Finance Committee on April 23rd, 2013

[The Chair, Conservative, James Rajotte]

Good morning, everyone. This is meeting number 115 of the Standing Committee on Finance.

The orders of the day are pursuant to Standing Order 108(2), a study on the report of the Bank of Canada on monetary policy.

Ms. Nash, you wanted to start the meeting.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, Mr. Chair.

I have a question about the agenda. I sent you a note asking about the Parliamentary Budget Officer, and whether she'll be joining us in the fourth week of April, as she's mandated to do by this committee.

[The Chair, Conservative, James Rajotte]

I was going to deal with that in the subcommittee.

Can we deal with that in the subcommittee?

[Peggy Nash, NDP, Parkdale—High Park, ON]

All right.

[The Chair, Conservative, James Rajotte]

The subcommittee is meeting immediately after this meeting.

Thank you

Everyone, we are very pleased to welcome back to the finance committee the Governor of the Bank of Canada, Mr. Mark Carney, at his final appearance before our committee.

Welcome back to the committee, Mr. Carney.

We're also very pleased to welcome back to the committee his senior Deputy Governor, Mr. Tiff Macklem.

Welcome to both of you, gentlemen. Thank you so much for being with us here this morning.

Mr. Carney, I know you have an opening statement and observations for the committee, and then we'll have questions from all the members.

Please begin your statement now.

[Mark Carney, Governor, Bank of Canada]

Thank you very much, Chair.

Tiff and I are very pleased to be with you this morning to discuss our April monetary policy report, which the bank published last week.

I should say at the outset that sessions such as these are an important part of the bank's accountability to Parliament and, through Parliament, our accountability to Canadians. We greatly appreciate members taking the time and the focus to drill down on our views on what's happening in the Canadian economy and what the prospects are for the global and Canadian economies.

In the report we note that global economic growth has evolved broadly, as anticipated in January. In the United States, the economic expansion is continuing at a modest pace, with gradually strengthening private demand partly offset by accelerated fiscal consolidation.

Significant policy stimulus has been introduced in Japan.

Europe, in contrast, remains in recession, with economic activity constrained by fiscal austerity, low confidence and tight credit conditions.

After picking up to very strong rates in the second half of 2012, growth in China has eased.

Commodity prices received by Canadian producers remain elevated by historical standards, and despite recent volatility, overall they are little changed since January.

The bank expects global economic activity to grow modestly in 2013 before strengthening over the following two years. Following a weak second half last year, growth in Canada is projected to regain some momentum through 2013 as net exports pick up and business investment returns to more solid growth.

Consumer spending is expected to grow at a moderate pace over the projection horizon, while residential investment declines further from historically high levels. Growth in total household credit has slowed, and the bank continues to expect that the household debt-to-income ratio will stabilize near current levels.

Despite the projected recovery in exports, they're likely to remain at their pre-recession peak until the second half of 2014, owing to restrained foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

On a quarterly basis, growth in Canada is expected to pick up to about 2.5% in the second half of this year. Despite this expected rebound, with the weak growth in the second half of last year, annual average growth is projected to be 1.5% in 2013.

The economy is then projected to grow by 2.8% in 2014 and 2.7% in 2015, reaching full capacity by the middle of 2015. This is later than the bank had expected in January.

Total CPI and core inflation have remained low in recent months, broadly in line with our expectations in January. Muted core inflation reflects material excess supply in the economy, heightened competitive pressures in the retail sector, and some special factors.

Total CPI inflation has been restrained by low core inflation and declining mortgage interest costs, with some offset from higher gasoline prices.

Both total and core inflation are expected to remain subdued in coming quarters before gradually rising to 2% by mid-2015, as the economy returns to full capacity, special factors subside, and inflation expectations remain well anchored.

The inflation outlook in Canada is subject to upside and downside risks, which are similar to those identified in January.

The three main upside risks relate to the possibility of stronger-than-expected growth in the United States and global economies, a sharper-than-expected rebound in Canadian exports, and renewed momentum in Canadian residential investment.

The three main downsized risks related to the European crisis, more protracted weakness in business investment and exports in Canada, and the possibility that growth in Canadian household spending could be weaker.

Overall, the bank judges that the risks are roughly balanced over the projection horizon.

Reflecting all of the factors I've listed, on April 17 the bank maintained the target for the overnight rate at 1%, and with continued slack in the Canadian economy, the muted outlook for inflation and the constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required consistent with achieving the 2% inflation target.

With that, Chair, Tiff and I would be very pleased to take your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Carney, for your opening presentation.

We'll begin members' questions with Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, and good morning to both of you. It's a pleasure to have you back here once again.

I have three areas that I'd quickly like to ask about. First, around our inflation target, both the IMF and the Bank of Canada have downgraded growth forecast for 2013 to 1.5%. Despite this, and despite the fact that inflation in the last several months has come in at only 1%, the bank has said it won't lower its target interest rate. I want to ask about that. Is it correct that your concern is over record-high levels of household debt that's discouraging further action despite the sluggishness of our economy?

[Mark Carney]

There are two factors that are influencing the setting of monetary policy. First, we are anchored on the inflation target, so we're trying to determine the right path to return the Canadian economy and inflation in Canada to that 2% inflation target. Our current expectation is that in about nine quarters—so a little more than two years—the economy will return to full capacity and inflation will return to the 2% target.

The reason we expect that is that financial conditions, very much as a consequence of monetary policy but also of other factors—the influence of global financial conditions—are very stimulative in Canada, so borrowing rates for Canadian corporations are at all-time lows, borrowing rates for Canadian households are highly attractive, and the currency has come off a bit, which provides a little more stimulus on the margin for the Canadian economy. So those factors, as a whole, are providing a considerable amount of stimulus, which , in our view, will bring the economy back on a reasonable path, in a reasonable horizon, back to target. As well, if I may point out, our expectation is that from the middle of this year the Canadian economy will be growing at a rate above potential.

To the second part of your question—I'll be quick—reflecting the housing sector and the evolution of household imbalances, on the margin we do take into account what is happening in the household sector, and on the margin that influences policy to be less loose, if I can put it that way, than it otherwise would be.

[Peggy Nash, NDP, Parkdale—High Park, ON]

You've expressed concern about household debt in the past.

[Mark Carney]

We have expressed a concern. We supported the moves taken by the government, by OSFI, to help with constructive evolution. We're encouraged by the direction of household imbalances. We think monetary policy has played a supportive role in that constructive evolution.

[Peggy Nash, NDP, Parkdale—High Park, ON]

To follow up on the whole issue of mortgage debt and interest rates, the finance minister recently instructed his staff to contact the banks that were offering interest rates below 2.99% to instruct them not to do so. Is it a concern, and is this the role of the finance minister, to call the shots with the interest rates of the banks?

[Mark Carney]

In terms of responsibilities for the evolution of household imbalances, obviously, first and foremost, the responsibilities rest with the individuals. People should take on debts that they think they can service over the lifetime of the loan. Canadians are responsible people, and we certainly rely on them to do that.

Institutions have a responsibility as well to ensure that the products they are offering are consistent with the constructive evolution and the ability for the borrowers to service those loans. I would say that as a whole we are encouraged.

I'll give you one fact. About this time last year, when the bank and the government started to take additional steps, the amount of floating rate debt, floating rate mortgages, that Canadians have taken on had fallen from about two-thirds of all mortgages that were being written at the time to about 10%.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Should the minister be making that kind of call to the banks?

[Mark Carney]

That's a discussion, obviously, with the minister.

[Peggy Nash, NDP, Parkdale—High Park, ON]

I have one last quick question. The government has raised the general preferential tariff on 72 countries, which will increase the cost to consumers on a whole range of consumer goods. Is it a good time to do this, when consumers are already facing record-high debt and unemployment is still high?

[The Chair, Conservative, James Rajotte]

Our time for this round is up. I don't know if the opposition wishes to come back to that in a future round—unless the governor can answer that in about 10 seconds, but I suspect not.

[Mark Carney]

I would be happy to have a broader discussion. I'd only note that price gaps between Canada and the U.S. have actually fallen over the course of the last two years, from the high teens to about 8% at the moment, on our current measurements.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Ms. Nash.

Ms. McLeod, please.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

Thank you, Mr. Chair.

I want to thank you, Governor, for all of the excellent work you've done for Canada, and I wish you well in your new endeavours.

I just want to make a quick comment. It's important to note that we have actually removed preferential tariffs; we haven't raised a tariff. I just wanted to make that comment.

I have one question coming out of your presentation, and then I hope to delve into another area. You're talking about three main downside risks in terms of the Canadian economy. You talk about the possibility that spending by Canadian households could be weaker. Are we talking about a double-edged sword here? We have expressed concern over household debt, but then it's also potentially a downside to the economy. Can you align those, short term versus long term, and clarify a little further?

[Mark Carney]

You've hit on a key dynamic in the Canadian economy and a very influential element of the projection. Obviously, as you're well aware, the level of household debt has increased substantially. Most of this debt is backed by assets, an increase in value of real estate. We all—and particularly the bank—have to be aware of the possibility that there could be a negative dynamic that gets introduced into household spending if there is a sharper adjustment in the housing market than we anticipate, for whatever reason. It could be because of a shock from abroad. It could be because of other factors. If there were to be a sharper adjustment, given the level of debt that many households are carrying, that could cause a sharper contraction in household spending, or, at a minimum, a slower rate of growth of household spending.

Given, obviously, that consumption is more than 55% of GDP, it has a big knock-on effect on the prospects for the economy. We're very alert to that. As you say—you used the term “double-edged sword”—it's a fine balance in terms of the adjustment the government and CMHC have taken on the mortgage insurance rules; that OSFI has taken, in terms of their supervision of financial institutions, the quality of the underwriting standards; and obviously, the balance that the bank has to take within the context of its inflation target, in meeting its inflation target, in the setting of monetary policy, so that there is, as we've termed it, a constructive evolution of household finances.

I would say that as we sit here today, we are encouraged by the fact that the rate of debt accumulation has slowed. We see the prospect of stabilization this year of the debt-to-income ratio. We're encouraged by the fact that the level of housing starts has come down to slightly below demographic demand, as we see right now. There's still more adjustment to go. We're encouraged by the evolution of house prices in a number of markets.

We're on the path to a balanced evolution of the household sector. We all have to continue to be vigilant to the risks of both sides, the risk that this could re-accelerate and create more imbalances, more vulnerabilities for the future, and this risk on the downside that you just highlighted.

[Cathy McLeod, Conservative, Kamloops—Thompson—Cariboo, BC]

I'd now like to focus in a little bit on the skills shortage issue. I believe you addressed it last weekend. Of course we've taken some measures in the Canada job grant. Can you speak to how much of it is a skills shortage and how much of it relates to the mobility of the workforce? Maybe give some general comments in terms of the skills shortage we face, which I think we all recognize as an extraordinary problem.

[Mark Carney]

I think there are two aspects. The first is that we should recognize, from a starting point, that the Canadian labour market is one of the more flexible labour markets in the OECD. There is considerable job mobility across this country that has been demonstrated at times when there have been sharper differences in growth, for example, in recent years between the west and the eastern parts of the country. So there is a fair bit of flexibility in the market. As you're well aware, there are a variety of things that can continue to be done on the credentials side, another side, to improve that mobility. But we start from a relatively good position there.

The challenge we have, and that other advanced economies have, is that the pressure to upgrade skills is never ending. As the nature of production in the global economy continues to shift, the need for an advanced economy like Canada to continue to build skills to ensure that we are creating the jobs in the higher end of those global value chains is absolutely essential. There are some signs of skills mismatches. We do believe, as others do, that employers play an important role in ensuring that lifelong skills development is a part of the nature of business in Canada.

I'll stop there and we can come back.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you Ms. McLeod.

Mr. Brison, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you, Mr. Chair, and thank you, Governor and Mr. Macklem, for appearing before us today.

There's been a lot of concern in Canada, fuelled by media speculation, about the comparison of the bail-in provisions in the most recent budget and those imposed in Cyprus. I think to reassure parliamentarians and Canadians, it would be helpful if you would define what the differences are, both in terms of the design of the proposed bail-in provisions here versus Cyprus and also the obvious differences between our banking systems.