Evidence of meeting #56 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was dollar.
A recording is available from Parliament.
11:45 a.m.
Conservative
11:45 a.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Thank you, Mr. Chair.
Good morning, Governor Carney, and thank you for your presentation and report.
I note with interest page 15 of your report, where you take us through an analysis of the recovery of our economy in the second and third quarters. You state here that the economy began to recover in the second quarter, due in part to a number of factors, including new purchases of consumer durables and renewed residential investment. You also mention that fiscal incentives also helped to fuel renovation.
Are you referring to the home renovation tax credit there?
11:45 a.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Okay.
What kind of stimulus do you think that contributed, in dollar terms, to the improvement in the second quarter?
11:45 a.m.
Governor of the Bank of Canada
Well, the one thing that needs to be recognized is that while the housing market is something that's near and dear to all our hearts, and something that's very prominent, housing is a relatively small proportion of the economy. We do see a strong housing market going forward. We saw part of this recovery in the second quarter. But we're talking tenths of a percentage point in the contributions from the housing market as a whole.
We will say, though, that in our view, although it's tough to quantify these things, the combination of the clear ending of the crisis--the free fall, if you will--the monetary stimulus and the fiscal stimulus, and the coordination that was seen globally should have had, and likely did have, a knock-on effect on the confidence of households.
11:45 a.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Right. So it had some impact on kick-starting the economy.
On page 15, again, you say this about the second quarter:
Government expenditures were another important source of demand, contributing 1.2 percentage points to growth (at annual rates) in the quarter.
Available indicators, including the recent pickup in employment, suggest that real GDP growth resumed in the third quarter. Household spending continued to recover, and the contribution of government expenditures increased.
What types of government expenditures are you specifically referring to here?
11:45 a.m.
Governor of the Bank of Canada
The paragraphs refer to, in broad-brush terms, the beginning of the infrastructure spending from the government's economic action plan.
We see--I think it's important to guide the committee--that this impact will build into 2010. And as to a growth in 2010, very importantly, it will be a relatively unusual recovery compared to history. It will be a little weaker than historically, but the key components will be consumption, more so than usual; housing a bit more than usual, but it's small; and government. It will be less from net exports than what we'd normally see because of how weak the United States is.
11:50 a.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
It's fair to say, though, that you are seeing the impact of government spending.
11:50 a.m.
Conservative
Bob Dechert Conservative Mississauga—Erindale, ON
Very good. Thank you.
Mr. Chair, I would like to share my time with Mr. Bernier.
October 27th, 2009 / 11:50 a.m.
Conservative
Maxime Bernier Conservative Beauce, QC
Good morning, Mr. Carney. Thank you for being here.
Last week, there were many newspapers reporting that you would not hesitate to intervene if the loonie rose too high against the American dollar. From the comments in La Presse, we get the sense that a strong currency has absolutely no positive impact on export industries or Canada's short-term economic growth.
However, a strong currency does have positive effects. It allows consumers to take advantage of lower prices, because of imports. It allows those travelling to the U.S. to benefit from a favourable exchange rate. It also benefits companies that import equipment, as you know, from the United States or elsewhere in the world. Lastly, it allows Canadian investors who invest abroad to receive a better return on their investment.
Therefore, if you were to intervene, it would also have a negative impact. It would mean creating Canadian dollars to devalue the loonie at the same rate as the U.S. Federal Reserve is devaluing the American dollar. In addition, it is a known fact that, during the Great Depression, competitive devaluation made the crisis worse.
So I want to ask you whether you think a strong dollar has both a positive and a negative side. If so, how will you make a balanced decision that takes all of those effects into account?
11:50 a.m.
Governor of the Bank of Canada
Thank you for your question. That is very important, of course....
11:50 a.m.
Conservative
The Chair Conservative James Rajotte
Mr. Carney, I'm sorry. Members have a habit of asking questions that take up all the time, so you'll have five minutes to think about that. We'll go to the Liberal round, come back to the Conservative round, and then you can answer that question.
Mr. Pacetti, please.
11:50 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Thank you, Mr. Chair.
Thank you for coming, Mr. Carney and Mr. Jenkins. I'm not sure you'll need five minutes to answer that question.
I also have some questions on currencies, but I think we've talked about them.
I'd like to get your opinion on the recent announcement on Friday that the U.S. government closed another seven regional banks. That hasn't really been discussed, and I think it will affect the way our banks approach things.
11:50 a.m.
Governor of the Bank of Canada
Without commenting on the specific institutions that were affected by that, as you and committee members are aware, there are difficulties in the commercial real estate sector in the United States, in addition to the residential real estate sector. A number of smaller regional banks are particularly affected, and a series of these closures were the product of commercial real estate losses.
In most cases, links between these institutions and Canadian institutions are non-existent.
11:50 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
That was going to be my follow-up question, because our banking institutions are heavily invested in the U.S. We're already seeing lending constraints here in Canada. There's less money available, even though the banks say there is more money available. Is that going to affect Canadian banks in terms of their liquidity or overall strength?
11:50 a.m.
Governor of the Bank of Canada
Canadian institutions do have varying exposure to the United States market. I think that exposure is well documented.
11:50 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Does that affect their lending capacity here in Canada?
11:50 a.m.
Governor of the Bank of Canada
Canadian banks on the whole are very well capitalized, and they have been lending. Household credit, largely from bank-based credit, grew north of 7% on an annualized basis through September. Business credit has now turned positive again. It was briefly negative in September. That lending capacity is there and is being deployed.
11:55 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
Thank you.
I'd like to challenge you a little on what you just said. I'm not sure what you were referring to. You said the Bank of Canada knew what was going to happen and you were well prepared. I'm just looking at the different projections from the bank and other experts. The one thing we did know was that we didn't know. That's my feeling.
As early as April we said that the economy was going to decrease by 3%, and then it was revised to 2.3% in July. I'm not sure where we are now. It's continuously changing. The economy is evolving.
11:55 a.m.
Governor of the Bank of Canada
I'll answer very quickly so you can have another question.
We knew beforehand about specific institutions having problems--that's what I was referring to. But on your projection point, the revision from 3% to 2.3% is almost fully explained by Statistics Canada revising the Q1 numbers. That's arithmetic, as opposed to a change in projection.
11:55 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
When you were here the last time it was almost unexplainable. Every time we have economists come forward they give us different amounts and say they're expecting different numbers in terms of recovery. We're getting different numbers from different areas. I understand that it comes with the job, but people are looking for direction. What should we know now about what will happen in the next six months?
11:55 a.m.
Governor of the Bank of Canada
The first thing I would say—and maybe I'm biased on this—is that the broad brush of our projection has been proven correct. We came here in January this year and said we expected a recovery to begin in the second half of this year, driven largely by the stimulus that has been put in place. And that's what has happened. Whether it was going to be in the third or fourth quarter, and the exact magnitude of that recovery...but we said that and were appropriately questioned by this committee on the reasons behind it. That has largely come to pass.
What are we saying going forward? We're saying that the recovery is going to be more modest than usual, so it will feel less like recovery than solid growth, if you will.
11:55 a.m.
Liberal
Massimo Pacetti Liberal Saint-Léonard—Saint-Michel, QC
The reason I'm asking is that we're seeing, for lack of a better word, a jobless recovery. Is there reason to be worried about the fact that the banks--again, not the Canadian banks, but internationally--don't seem to be recovering as quickly? Some have and some haven't, if we look to the south. Is there a risk that we're going to have one of these ups and downs in terms of recovery?