Everyone likes to hear an optimist speak, yet optimism needs to be tempered with reality and that is what is missing in the Bank of Canada’s recent policy statement. The statement starts off with a simple bold assertion that “The global economic outlook remains solid. The US economy is especially robust”. Let’s examine those two fundamental observations closely.

Global economic outlook. Recent projections by international organizations, such as the IMF and OECD, have downgraded earlier forecasts in the wake of the US-China trade war. The slowdown in China, currently underway, will result in reduced international trade flows. Making matters worse are the pressures facing key emerging market economies as they contend with growing trade deficits, rising debt-servicing costs and the withdrawal of foreign capital. Tightening monetary conditions instituted by the Federal Reserve are been felt throughout the international equity and bond markets. Oddly, the Bank states that ‘financial market volatility has resurfaced and some emerging markets are under stress’, but then goes on to dismiss this point and argue that ‘global financial conditions remain accommodative’. Both conditions cannot exist at the same time.

US economic conditions.  U.S. monetary tightening has begun to take its toll. Recent data on U.S. home sales, for example, show a drop of 5.5% last month and homebuilders are feeling the effects of a slowdown in demand.  U.S. protectionist policies are also starting to hurt manufacturers who are facing rising costs from new tariffs on basic inputs, such as steel. The outlook is clouded by the prospect of additional tariffs starting in January 2019. Inflation continues to remain around 2 % and real wages have yet to improve, despite huge corporate tax cuts and record earnings. The downturn in the stock market can be considered as one of the signs that the U.S. outlook is far from ‘robust’ as the Bank claims. Finally, the twin deficits--- government and the current account —will reduce U.S. growth in 2019 and beyond.

Canadian Economic Conditions. The Bank’s optimism resides in its outlook for the domestic economy. The Bank relies heavily on its survey of projections for business investment and related exports. It is one thing to express plans to expand and quite another actually to break ground. Again, oddly, the statement acknowledges that ‘investment and exports will be dampened by the recent decline in commodity prices. Much of the Bank’s hopes for business investments is based upon the relief emanating from the signing of the USMCA deal and the removal of uncertainty. We need more than sentiment to be convinced that the economy is going to expand from greater investment.

The state of the Canadian consumer is uppermost in the mind of the Bank when it argues that ‘household spending is expected to continue growing at a healthy pace’, without offering any supporting evidence. Average wages gains (2.4%) barely exceed the latest estimate for the CPI (2.1%). Given the combination of stagnant real wages and rising costs of housing, it is hard to envision why household spending will be robust.

Finally, the Bank projects the economy will grow by 1.9% in 2019 equal to its potential. However, most of this growth will be derived from population increases (natural growth plus immigration) and not much due to productivity gains. It is the latter that is the source of improved economic conditions.