Bank Of Canada Sees A Different Economy Ahead

While Business Confidence tends to lead Canadian GDP (above chart), it is clearly making lows not seen since 2015 (when the Canadian economy dipped into recessionary territory, i.e GDP growth fell below 0).

Somehow, however, the BOC, in its decision to leave interest rates unchanged earlier today, sees something better:

"There is nascent evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years"

I did have to look up "nascent" (to get the exact meaning): just coming into existence and beginning to display signs of future potential.

Apparently this is something that Canadian Business is not seeing. Which means that either the BOC is looking through a rose-coloured crystal ball or Canadian Business is not seeing the brighter future. 

The BOC acknowledges the risks: "Indeed, ongoing trade conflicts and related uncertainty are still weighing on global activity, and remain the biggest source of risk to the outlook."

I would suggest from recent headlines that the ongoing trade conflicts are not going away in any hurry and even if some solutions are found, there is going to be a considerable lag between the time of implementation and the benefits from any resolution.

So, obviously, I remain in the cautious camp with the rest of the Canadian business folks who are less confident.

The real reason that the BOC won't lower interest rates, unless they absolutely have to is because they are worried about the Canadian household coming to the trough if lower rates should happen: "The bank continues to monitor the evolution of financial vulnerabilities related to the household sector."

The real vulnerability is employment. If the less than confident businesses start taking cost-cutting measures by reducing employment, the over-indebted and vulnerable households will start to feel it and so will the two things that are supporting the Canadian economy: the consumer and the housing market.

That may show up in November's employment / unemployment data (Labor Force Survey to be released this Friday) or even in future employment reports into 2020.

We will also get a glimpse at how U.S. business confidence is driving employment / unemployment this Friday.

As President Trump stated yesterday in London: "If the stock market goes up or down - I don't watch the stock market... I watch jobs. Jobs are what I watch."

Perhaps the Bank of Canada will be watching too?