Finance Committee on Oct. 26th, 2010

[Thomas Mulcair, NDP, Outremont, QC]

We are not asking Mr. Hodgson to become a Buddhist monk after his departure. However, we do have some very stringent rules that apply to parliamentary secretaries, or elected officials, and especially to ministers, given the information that they have.

You are telling us that you do not see any type of ethical problem whatsoever, at least not as far as perception is concerned, that would result from having someone like Mr. Hodgson spend 18 months with the Bank of Canada, get to know the entire alarm system, the architecture of the house and then leave with all of this private information. You see no problem with that, Mr. Carney?

[The Chair, Conservative, James Rajotte]

You have about 30 seconds.

[Mark Carney]

Very quickly, we have conflict of interest regimes in place at the Bank of Canada; we have post-employment responsibilities that extend from those conflict of interest provisions. We are privileged to have somebody like Mr. Hodgson working under those conditions.

I do not know what the individual is going to do 17 months from now when this work is finished. Our full intention is to make sure that this important work is finished, which is in all our interests. But we are very pleased that he is here in an entirely appropriate circumstance, above reproach.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Pacetti, please.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chair.

Thank you, Mark. Thank you for appearing, Tiff. Welcome to the committee. It's always interesting to have you guys over.

One of the numbers I always like to ask you about is Canada's growth. Again—and it may be a compliment—nobody else has been able to predict it in the last two years. You're part of the same batch, but we haven't been able to predict the last quarter in terms of what our economic growth is going to be. I think you were quoted as saying let's not obsess about it, let's not worry about it, let's not panic. But shouldn't we be panicking from a government point of view? It's going to affect government's revenues and then it's going to have some other spinoffs.

But let's just stick to your prediction of the last three months and tell me why I shouldn't be obsessed or shouldn't panic about it.

[Mark Carney]

The point in that response is that last week my colleague and I were trying to focus on what the core drivers of growth were over the course of the horizon. We expect that there will be an important adjustment in the third quarter on the housing side. It's a level adjustment. I'm not saying it's not important, but that's not something we see persisting all the way through the forecast horizon. That's the first point.

Second, there are elements of weakness on the net export side, particularly in the third quarter, in our estimation, that are also helping to keep the level of growth below 2%--more precisely 1.6% in our latest forecast.

What we see is the pace of growth--and we've given our quarterly projections in the document, as you know--picking up from there not as rapidly to make that up, but into 2.5% and beyond going forward through the forecast horizon. The point we were trying to make--not that it's not important what the level of growth is at any time or any quarter, but what the underlying drivers are--is we're predicting over our forecast horizon some moderation in consumption and some displacement of activity toward investment, very importantly, and on the margin, much less importantly--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

In English, what does displacement investment mean?

[Mark Carney]

It's in business investment. We see an important rebound in business investment that began in the second quarter and picked up through the third quarter, very importantly, and into the next year. And I would say, in understanding our projection, that is central to the dynamics of this projection. If that momentum in business investment that has just started does not persist, growth will be lower, all things being equal.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I think that's obvious. But the part that bothers me is that Canada is normally ahead or slightly ahead of the American growth numbers, and we're below American growth numbers.

[Mark Carney]

The important difference between Canada and America is that Canada is already back to the level of activity our economy had before the recession. America will not get back to that level until early next year. That's the first point. And there's the much bigger difference, as you well know, in the performance of the labour market.

The second thing to recognize is that the potential growth of the American economy--the sum of productivity and labour input--is faster, in our estimation, than the potential growth of the Canadian economy.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

That was going to lead to my next question. I think you were also quoted as saying that productivity is actually much brighter for Canada. I don't want to misquote you, but the numbers don't reflect that. So is it policy or is it the environment? What factors are attributable to that?

Before I forget, where do I see, in the monetary policy report for October, the difference between U.S. growth and Canadian growth? Is that chart 2 on page 4?

[The Chair, Conservative, James Rajotte]

You have about 45 seconds.

[Mark Carney]

You have to use table 1 and table 2 in the document to compare the two annual levels of growth. We give more detail on the Canadian forecast, because we do a quarterly one in table 2. Those are on pages 10 and 22.

We see Canadian productivity picking up over the forecast horizon. There is a box in here that explains why, how, and to what extent. That being said, it does not pick up enough to compensate or get us back to the levels of overall potential growth we enjoyed earlier this decade. So if you think of Canadian growth as being around 3% in real terms--the sum of productivity and labour input--earlier this decade, in the 1990s, we're getting back to about 2%--

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Is there any government policy that can help productivity?

[Mark Carney]

There is, but we're out of time.

[The Chair, Conservative, James Rajotte]

That's a big question. We'll have to follow that up in later rounds.

Mr. Carrier, you have five minutes.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Thank you, Mr. Chairman.

Good afternoon, Mr. Carney. It is a pleasure to see you again. Welcome Mr. Macklem, who I do not know yet, but who I will certainly get to know.

My first question pertains to the regions you mentioned on page 4 of your report. Your report reads as follows: “Recent developments highlight important geographic divergences in underlying economic growth.” You have some charts that illustrate the situation in various regions and countries.

When you deal with the topic of regions, I was wondering whether you were thinking of those found in our huge country, with its regions that are so diversified. You do not mention this, to my knowledge. I would like to hear your thoughts on the matter. How do you treat these data? You no doubt have data about the various regions in Canada. How do you manage to come up with a common portrait?

[Mark Carney]

Thank you, sir.

As far as the divergences amongst the regions at the global level are concerned, I would say, very quickly, that there is clearly a huge difference between the growth rate of emerging countries and that of the developed countries. That has been one of the problems with this global recovery.

With respect to the Canadian regions, we are closely monitoring the growth in factors that impact on growth in the various regions of Canada, our country. We have regional offices that do research for each region, but we do not officially do forecasts for each region. Why? Because we manage the monetary policy for the entire country.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Take for example a region where the economy is overheating, like western Canada with its oil sands development. The economy there is holding up quite well. However, that might lead to some problems, such as an increase in the value of the Canadian dollar. That could hinder other regions, like Quebec in particular, which is very dependent on its exports to the U.S.

Therefore, setting the interest rate according to the overall state of the economy at a given time can place some regions at a disadvantage. Do you not take that into account?

[Tiff Macklem]

Of course, Canada is a large country. We consider data from across the country, and as the governor has just indicated, there is a single monetary policy for all of Canada. There are significant adjustments to be made throughout the country, and the more flexibility there is between our provinces, the better. Something important that we have learned in recent years is that flexibility has increased in Canada. That is a positive development.

Clearly, some regions are always stronger and others weaker. Nevertheless, over a longer period of time, we note that inflation rates among the various regions tend to converge—as you know, our mandate is to control inflation. And so, it makes sense to have a single inflation control policy in Canada.

[The Chair, Conservative, James Rajotte]

You have 45 seconds remaining.

[Robert Carrier, Bloc, Alfred-Pellan, QC]

Will the government's decision to get rid of Statistics Canada's long-form census hinder your ability to collect data in order to prepare sound economic forecasts for Canada and the regions?

[Mark Carney]

With regard to that change and our work with Statistics Canada, I would like to inform you that we are working in close cooperation with people at Statistics Canada in order to make sure that we properly understand all the statistics compiled by that key organization. That work is ongoing.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Carrier.

Mr. Wallace is next, please, for five minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

I want to thank our guests for coming today.

I'm going to start with a very broad question or two, and then get more specific about the report so I can I understand. I learn something every time I read these things, or at least I think I do, and I need your advice or your guidance on this.

To me, much of the economy is driven by confidence. If they have confidence they spend, things grow, people tell you it's growing, they believe you, and they keep it going.

My issue is this, and I asked this of the economists who were here before. We're talking about a growth rate that's less than 3%, and the indication is that it's negative. Some countries I noticed in here are way up there, 9% for China, for example, but Europe is at 1.1%, Japan's at 1.3%, the rest of the world is at 3.6%, and the United States is at 2.3%. But if we are at 2.6% or 2.8%, why is 3% such a magic number? Why can't we be happy with 2.5% growth? Why can't we say, “Look, we're growing, things are moving in the right direction, and we need to continue on that path”? Tell me why 3% is that magic number. Who came up with that?