Evidence of meeting #79 for Finance in the 39th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was economy.
A recording is available from Parliament.
Noon
Conservative
Noon
Liberal
Robert Thibault Liberal West Nova, NS
Thank you, Governor, and thanks for being here once again.
When we talked about interest deductibility, you pointed out the risks to it and also the good points or the reason to do it. It seems to me there is a risk that announcing you will be doing it without having the plan in place could bring uncertainty to people as to their investments in Canada, and to head offices in Canada, and those things. But that's not the point I want to raise with you today.
I want to talk about the consumer price index and inflation. Being from the east, we're getting hit with a double whammy now, with the rise in the Canadian dollar—which is the negative side of our success, because we export a lot of fish and a lot of products such as tires into the U.S. market and are at a disadvantage vis-à-vis the situation with a lower Canadian dollar—and with the increasing price of energy for gasoline, diesel, and all of those products. It costs us more to harvest our fish, it costs us more to ship our products, and our energy is high.
If I speak to a household or a small business, they will tell me their inflation rate is a lot higher than 3%. When I look at your figures for domestic consumption, showing an increase in the 4% to 5% range, they would tend to point to a lot of that being on the energy side also. The energy side, in the basket of goods being bought, is disproportionate to all other items in those areas.
Can you tell me whether you've made those calculations, if you can identify them, and whether you see ongoing risks for the future?
12:05 p.m.
Governor, Bank of Canada
First of all, you used the word “disproportionate”. We spend a lot of time worrying about the consumer price index, obviously. We are probably Statistics Canada's most avid critic--in the good sense of the word--of what they do. We think our consumer price index in Canada is certainly among the best in the world, probably better than consumer price indices almost everywhere else in terms of its representativeness.
When the prices of products you purchase regularly move up, it always seems that's what is really going on. The most regular purchase, and the one everybody knows, is the price of gasoline. Even if you don't purchase it, you pass the signs on your way to work every day. And everybody knows the price of basic foods, because you're buying bread, milk, eggs, and so on every week. So you are highly aware of what's happening in those movements. It is absolutely true that gasoline and fuel prices have been going up very much more rapidly, so you think the whole index is moving more rapidly. With the rise in the price of grains recently--and that feeds fairly rapidly through to dairy products, chicken and so on--you see that. So on these frequently bought items, you think Stats Can must be wrong, but--
12:05 p.m.
Liberal
12:05 p.m.
Conservative
The Chair Conservative Brian Pallister
No, no. Excuse me, sir. Out of fairness to other committee members, I'm going to have to be unceremonious and cut you off at this point.
We continue now with Mr. Dykstra. You have four minutes, sir.
12:05 p.m.
Conservative
Rick Dykstra Conservative St. Catharines, ON
Thank you, Mr. Chair. I certainly appreciate your judgment in these matters.
I do have one off-topic question, Mr. Dodge, that I do want to ask you. One of the things I've noticed over the years is that when very competent and well-educated, well-positioned folks who work in the civil service move on to new careers, they come back to the areas where they served government. I wonder if that is your plan or whether you plan on heading up to the cottage.
12:05 p.m.
Governor, Bank of Canada
I'm going to take six months off. I've worked for 40 years without a break, and my wife thinks it's time. She may regret that. Over that six months I'm going to think about what I will do next, and hopefully I'll find something useful to contribute.
12:10 p.m.
Conservative
Rick Dykstra Conservative St. Catharines, ON
All right. Well, I would take bets that we may see you back here again at some point in time--presenting on behalf of someone. All the best.
One of the questions that I certainly thought Mr. McCallum was going to ask this morning--he's asked you pretty well every time we've been here--was on income trusts and the changes that have happened over the last number of days, weeks, and months.
Obviously, it had an impact, but at least from updates I've read over the last couple of days, there have been significant changes in terms of the direction they have gone--in a positive way. I wonder if that has had any impact on your outlook in terms of the Bank of Canada, but also from a monetary perspective, that in fact we have taken the right direction.
12:10 p.m.
Governor, Bank of Canada
Obviously, we have two interests, generally. One is the efficiency of markets. On the income trusts as a corporate form of organization, what we said, and what our analysis showed, was that it's a perfectly sensible corporate form of organization in appropriate circumstances. But second, there appears to be no valid reason to have the tax system tip the corporations or entities towards choosing that form of organization vis-à-vis another form of organization.
I guess more fundamentally, and deeper, the one thing we worry about at the Bank of Canada, along with I think central banks almost everywhere, is that there seems to be a lot more global liquidity out there than one might have anticipated, given the rate of growth, of base money, whether you look at Europe, the United States, Canada, or elsewhere. That's clearly come because of changes in the structure of financial markets, changes that we think, by and large, have led to the improved distribution of risk. But they are changes that also seem to mean that there's a lot more liquidity out there, and what we call the “risky spreads” seem to have become pretty narrow. Indeed, we're off to Basel this weekend to meet with central bankers, and this issue will again come up.
This, fundamentally, is an issue we continue, with central banks, to worry about. It may mean, with the changes in financial markets, that we have to look at things a little bit differently going forward. There's a lot going on out there. This is a very real issue.
12:10 p.m.
Conservative
12:10 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Thank you, Mr. Chairman, and thank you, Mr. Dodge, for appearing.
I think you're only going to retire in January, so I believe we'll have another chance to see you in the fall.
12:10 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
So I won't say that it was nice working with you, because we only have four minutes.
12:10 p.m.
Voices
Oh, oh!
12:10 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
I'm going to try to keep responses limited, because I want to try to narrow down where the Canadian economy is going to go in relation to the U.S.
If we remember, some of the cries six months ago were that if the American economy was going to falter or slow down, if Americans were going to stop spending, the Canadian economy would falter and the Canadian dollar would also go down. That doesn't seem to be happening. I think you answered that question. But if we narrow it down, what are one or two indicators, if I can limit it, we have to be on the lookout for that show that Canada could fall into the trap and follow in the same footsteps as the Americans?
12:10 p.m.
Governor, Bank of Canada
First of all, we're looking for the American economy to grow relatively slowly in 2007, but to go back, roughly, to potential in 2008-09.
What is the weak part of the U.S. economy? We think housing--residential investment--will continue to be weak right through 2007 and 2008. That has a big impact on us, not just for lumber but for other products. And we have a little box in here. So that is probably the biggest single factor.
The one other factor that has been a worry is automobiles. The inventory correction now appears to be largely over, and while we won't see 18 million units a year being sold in the United States, we should see sort of normal demand return.
12:15 p.m.
Senior Deputy Governor, Bank of Canada
If I could just quickly add something, the other point here is to keep a perspective on what's happening to the global economy overall. The fact that we have a rather robust global economy, notwithstanding the slowing in the U.S., of course, has important implications for Canada through commodity prices in particular generating a lot of income. So one of the points we've been continuing to focus on is the importance of looking at a very important issue, which is the U.S. slowing, but making sure we look at it in the context of what's going on globally.
12:15 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
I understand, and that's why I'm trying to condense this.
Again, because our economy is so attached to the U.S., we could look at it conversely. If the U.S. economy were to recover rapidly, for example, if the housing recession declined or the depression or the slowdown stopped slowing down, and if the Canadian economy were to bear the fruits of some of that, would there be an expansion? Would the Canadian economy have the capacity to expand, or are we running at full tilt?
Again, I'm using that example, but I'm sure there are others. Let's focus on the housing sector and the automobile sector.
12:15 p.m.
Conservative
The Chair Conservative Brian Pallister
You have approximately one minute to answer that one, Mr. Dodge.
12:15 p.m.
Governor, Bank of Canada
Yes. Unfortunately, I have to answer the question by saying it depends. If all of a sudden we were to indeed see firm residential construction take off in the United States, we have the capacity to meet that. We have lots of lumber mills that are not operating at full capacity in this country.
12:15 p.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
But what happens if it's for resources where there is no room for capacity? What happens to the Canadian economy?
12:15 p.m.
Governor, Bank of Canada
Well, then there's more upward pressure on inflation in Canada.