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.