We got our first look at how events in the U.S. during the past two weeks are going to play out around the world. The Bank of Canada met earlier this week and surprised the markets by changing its outlook for the United States economy. Specifically, it switched gears and instead of predicting interest rate increases in the near future decided to go neutral. We are early in the tenure of new Governor Stephen Poloz, so it is unclear if the change was due to his strategy or recent events, but we believe the events happening south of the Canadian border were responsible.
In its statement, the Bank of Canada announced that it was lowering the growth in GDP forecast for the U.S. – its primary trading partner – to 2.5% from 3.1% previously. That is what can be labeled a plunge in expectations in the relatively staid parlance of economics. Clearly, the disaster of the last few weeks in the U.S. had an effect on how the bank viewed the U.S. The drop in growth expectations carried over into the Bank of Canada's domestic expectations, as the bank lowered its expectations for Canadian 2013 growth to 1.6% from 1.8%. Next year's growth forecast got chopped from 2.7% to 2.3%.
This actually repeats a trend we are at least starting to see around the world. Central banks in Sweden, Norway and the Philippines held interest rates steady this week as well. A good deal of this posturing will clearly have to do with currency values. With the global economy still sputtering, no individual country will want to see its currency rise and choke off any hope it has of growth from its export sector.
Certainly we saw that play out in the Canadian dollar, which dropped a good 1% on Wednesday after the news came out. This currency may be one of the few to be weak against the burnished U.S. dollar as we progress further toward yearend.
My View: While the Bank of Canada announcement was a bit of a surprise to the markets, there is nothing surprising about how the recent sinking of U.S. growth prospects is affecting the rest of the global economy.
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