Finance Committee on April 24th, 2012

[Mark Carney]

I think the lessons of the Canadian financial system can be boiled down to three or four lessons: a focus on real capital; a belt-and-suspenders approach with a leverage ratio, so you look at actual assets over actual capital and not just risk-weighted; a proactive supervision model that is practised by OSFI as an important component of that. These are the core lessons that come from Canada that have been followed.

Away from that, I think this is what we're all focused on in the advanced economies. Some are immediately focused on fiscal sustainability—without question—but then more broadly, we're in a global economy that is dominated by this phenomenon of deficient demand in the advanced economies.

Because households in the United States have to repair their balance sheets, because they've lost so much wealth from their houses and to some extent their stock market, because banks and governments in Europe have to repair their balance sheets, there are these big headwinds that exist in the major advanced economies. That puts a real pressure on an economy like Canada's, which needs to rely more than ever on domestic sources of growth, first, which is what we've done. As we've discussed, at the same time we need to build those new markets, so we get growth from investment that is poised and focused toward those new opportunities and ultimately from exports for those opportunities.

It's a difficult transition. It's a big transition of the economy, just to underscore what we've been discussing. This is not just a resource issue. This is how we reorient our manufacturing to where you started. It's in the changing nature of work, which goes to the service sector at its heart.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Adler.

Mr. Caron, the floor is yours.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much. I will be brief, because I am sharing my time with Mr. Mai, unless he finds the answer really interesting and allows Mr. Carney to continue speaking.

Please be brief, because I have two questions. Could you please provide an answer in two and a half or three minutes?

The Canadian dollar has appreciated significantly in comparison to the American dollar for the past decade. Its appreciation with respect to the euro has been less dramatic. I would like to know what the current trend is. Where is the Canadian dollar heading with respect to the currency of these emerging countries with whom we will eventually be dealing?

When you talk about the restructuring that will occur in the Canadian economy, what industries are most at risk and which ones could stand to gain, should the dollar follow the current trend, namely that there be neither a dramatic rise or fall?

[Mark Carney]

I will answer the first question and Mr. Macklem will answer the second.

Let's discuss the relationship between our currency and emerging countries' currencies. Last week, China increased its currency's flexibility. That is a good thing because it is absolutely essential to increase the Chinese currency's flexibility in order to adjust demand within the global economy. It is difficult to say in the world of currencies, but what is clear or likely is that in the medium term, the major emerging countries currencies will increase in relation to the American dollar and most likely in relation to the Canadian dollar. This is another reason for which our societies must open up markets within the emerging countries because we will see other revenues, that is the appreciation of their currency in relation to ours.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Do you have an answer to the second question?

[Tiff Macklem]

As you said, a change in the value of the Canadian dollar has various effects on companies, depending on their area of activity. For example, if we are talking about an import company, a stronger dollar means it is less expensive to buy goods or services from other countries. In that case, it would probably be good for that company. It would be a positive thing.

Furthermore, that company may have to make major investments. Most of the machinery and equipment in our country comes from abroad. So it costs less to buy it with a higher-value currency.

On the other hand, if a company mostly exports, that would be a negative thing.

We have conducted surveys. We have regional offices across the country. Companies have done surveys for us across the country to study the various effects on different companies and to have an idea of the aggregate effects because, ultimately, we only have one instrument, one single goal, which is to target inflation at 2%. We must therefore consider the economy as a whole. We can see that overall a higher currency slows growth in Canada, and all things being equal, this will exert a downward pressure on inflation. This is something we keep in mind in doing our daily work.

[The Chair, Conservative, James Rajotte]

Mr. Mai, you have two minutes.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

I find this most refreshing. I find it very interesting that the Governor of the Bank of Canada speaks of sustainable development when we talk about natural resources. In your opinion, when we speak of sustainable development, should we also internalize environmental costs?

[Mark Carney]

That question should be put to the federal government and provinces, not the Bank of Canada.

With respect to companies, it is always a good idea to think in the medium term. On a global scale, companies—and that includes companies that work in the commodity sector for example—have included a virtual price for greenhouse gases. That is quite normal for large corporations. That would be an input for an investment decision because in the context of a long-term project, a project that is staggered over 30 years, at some point, there probably will be a cost for that.

That is the best practice.

So it is a good idea, but it is up to the private company. I do not comment on government decisions.

[The Chair, Conservative, James Rajotte]

All right, thank you.

Thank you, Mr. Mai.

We'll finish our rounds with Mr. Van Kesteren, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

I have a quick question, Governor. Once I'm done that I'll pass the buck over to Mr. Jean.

I want to finish up talk on the high Canadian dollar that is at least perceived as being a result of natural resources. Some have said it's an artificially inflated dollar. There's also a reference to the hollowing out of the manufacturing sector as a result of that. They refer to that as the Dutch disease. I came from the Netherlands just last week, as a matter of fact.

This is a common refrain in some circles. What's your opinion? Are we seeing a hollowing out of the manufacturing sector? Is that happening as a result of our dollar being tied to it?

[Mark Carney]

I'll try to be quick. It's an important question.

To bring it together, Dutch disease means technically that you have a spike in activity because of a spike in the price of a product that then goes down. Our view is that commodity prices are going to stay elevated for some time, so we're not seeing a spike; we're seeing a natural adjustment. That's the first point.

Second, in that environment it's better to have commodities than not. The question is how well you develop them in a sustainable way to capture the most value added.

Third, it's important that we have the adjustments in the economy we talked about earlier. That means partly labour moving and it's also capturing more of the value added, as I said.

Fourth, there are tremendous opportunities for Canadian manufacturing. Some of those opportunities are easier to take advantage of because of where the currency is. As Mr. Macklem said a moment ago, there's the advantage of importing machinery and equipment to build productivity and build up new markets. We've detailed in other speeches some of the opportunities that exist for our firms from digital commerce, big data, the changing nature of work, resource productivity, and other aspects. Those opportunities are there.

What's important is that our economy continues to adjust to the broader forces in the global economy. In our view, those broader forces are commodity prices being elevated for some time; the transformation in terms of the relative importance of emerging markets; and a United States that is not as strong as it used to be. I choose all those words advisedly. It's not that the United States is terminally wounded or anything like that, but it is going through a multi-year process of rebuilding and adjusting to the aftermath of the crisis. That means a U.S. economy that grows more like 2% to 2.5% each year instead of the 3% to 3.5% we became used to.

All of those are broader forces. Domestic demographics is the final one we need our economy to adjust to in order to continue to build prosperity. The contribution of the Bank of Canada will be price stability, as defined by the inflation control agreement with the Government of Canada.

[The Chair, Conservative, James Rajotte]

You've got about two minutes maximum, Mr. Jean.

[Mark Carney]

Shouldn't we end on that rousing...?

[The Chair, Conservative, James Rajotte]

I could, but it's up to Mr. Jean.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

I want to end on a note of positive work mobility. I'd like to talk a little about and hear from you from your expertise and have you describe some of the ways we can make Canada's labour more mobile. As you know, the Canadian Chamber of Commerce recently cited this as the top barrier for business, and the Association of Canadian Community Colleges called the labour market imbalance the largest threat to our economy.

We have 1.7 million passengers per year flying into the Fort McMurray airspace. So 141,000 passengers per month are flying in there, and we still do not have enough people—not enough skilled people, not enough unskilled people. For some odd reason, with the highest household income in Canada, $185,000, we can't seem to attract them.

I've looked at some of the impediments to work mobility, and one of them is the issue of housing to accommodate the labour demand.

I know you're not going to be able to give an answer, but if you could provide the committee with an answer in writing I'd greatly appreciate it. How can we use the Canadian market more effectively as far as labour mobility?

[The Chair, Conservative, James Rajotte]

The members of this committee love me so much that they ask these great questions and then leave you ten seconds to answer.

You have about 30 seconds.

[Mark Carney]

As the member knows, everything that can be done to enhance the portability of trades across the country—and much has been done.... Anything more that can be implemented to ensure that always bears monitoring: how well things have worked in practice as well as in theory.

Of course, as you also well know, when you think about the dynamics at Northern Alberta Institute of Technology and Southern Alberta Institute of Technology, there's the need to continue to grow the number of people who are qualified in the trades. Part of that is getting the sustainability of this demand across the country, that this demand is going to be here for a while. These are good opportunities; they're far-above-average incomes and they're good careers. A real skill is needed. And obviously we would all prefer that we max out the number of Canadians who seek these jobs and get these jobs before we import those skills. Canada is built on immigration, but.... So getting the message across that these opportunities will persist for some time, in our opinion, I think is as important as shorter-term fixes.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Jean.

Thank you very much, Mr. Carney and Mr. Macklem.

I thought you were going to use yourself as an example of labour mobility from Fort Smith to Edmonton—

[Mark Carney]

--to Harvard to Ottawa--

[The Chair, Conservative, James Rajotte]

—to Oxford to Ottawa and beyond.

I want to thank you so much for being with us and for your responses to our questions. We had an excellent discussion here this afternoon.

If there's anything further you wish the committee to study, please submit it to us, and we will ensure that all members get it.

Thank you so much for being with us.

Colleagues, I have a couple of items I need to deal with, so I'm going to suspend for a couple of minutes. We'll say goodbye to our guests and then resume.

Thank you very much.

[The Chair, Conservative, James Rajotte]

I call the meeting back to order.

Colleagues, we have two hopefully very short items.

First, I have some very sad news to report. I've received the resignation, unfortunately, of Mr. Mai as the vice-chair. Perhaps Mr. Mai should explain.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

It's been a pleasure to be the vice-chair. I'm still on the committee, I'm happy to be here, and I'll nominate Peggy to be the vice-chair.

[The Chair, Conservative, James Rajotte]

Yes, we can proceed right to the election of the first vice-chair.

Ms. Nash is nominated.

Ms. Glover.