In releasing its July report on monetary conditions, the Bank of Canada makes the case for a downward revision in Canada’s short term outlook. Arguing that “ the  underlying forces that underpin stronger growth in Canada are intact “ the Bank concedes that both domestic and international conditions  led to the revisions. As with all central bankers, remaining optimistic, in spite of serious headwinds, is part of the job description. Yet two fundamental activities of the Canadian economy continue to underperform and cast their shadow over the economy.

Business Investment Stumbles

Table 1 compares the forecast for 2016 and 2017 presented in April and July. The weakness in business investment --- new investment in plant and equipment—continues to plaque the economy. The lack of investment will drag down the economy in 2016. It expected to improve in 2017 but its overall contribution to GDP remains very low, barely positive. Granted this poor outlook is reflective of the dramatic fall off in investment in the energy and commodities` sectors. Yet, its impact is being felt in the non-energy sector and this is contributing to an economy-wide slow down.

The Bank goes onto explain that:

 “ this lower investment profile.... does not just mean slower growth in GDP, it also means a reduction in the economy’s potential”. In a rather extraordinary admission the Bank says “the uncertainty around potential output remains high because it is not clear how much productive capacity will ultimately be rebuilt as the economy strengthens. In other words, the less we spend on new investment the lower our potential growth which feeds into lower levels of new investment in the future – an undesirable cycle.

Non-energy Exports Disappoint

The Bank pins a lot of its hope on the non-energy sector offsetting the serious decline in energy and commodity exports. However, this anticipated development seems so far off, given that the volume of non-energy reports actually fell in May. Thus the benefits of a cheaper dollar seem to be nullified by the loss of export markets in the US and elsewhere--- or, at best, no gain in market shares. The National Bank of Canada ( a  commercial bank)  points out that the volume of “ non-energy exports remain about 10% below the peak reached in 2007”.Real exports are on path for a 20% decline which represents a serious drag on the economy in Q2.

In sum, Canada can expect some modest economic growth in the remaining of 2016 and 2017. But what is in doubt is how meaningful that growth will turn out. Two of the most vital aspects of the economy- business investment and exports- continue to disappoint.