Finance Committee on April 24th, 2012

[The Chair, Conservative, James Rajotte]

I guess that's a yes-or-no answer, Mr. Carney.

[Mark Carney]

Not publicly.

[Voices]

Oh, oh!

[The Chair, Conservative, James Rajotte]

Okay. Thank you.

Thank you, Mr. Brison.

We'll go to Mr. Hoback, please.

[Randy Hoback, Conservative, Prince Albert, SK]

Thank you, Chair.

Governor Carney, it's great to have you here today.

Governor Carney, before I get started, I just want to compliment you on how you go about doing your role. The way you go about doing your job actually instills confidence in Canadians and in Canadian businesses. I think the way you and the finance minister have conducted yourselves over this last series of troubling years has been very reassuring. I think Canadian consumers and Canadian businesses thank you for the work you've done there.

One thing I would like to talk to you about is trade. You made a speech in Kitchener last week and you talked about the emerging markets and how important they are to Canadians. Of course this government has been out and about very actively pursuing trade agreements. Whether it's Minister Fast or Minister Ritz or Minister Ablonczy, or even the Prime Minister, it seems like every break week we have in Ottawa they're out and about around the globe, trying to open up new markets for Canadian businesses. Can you explain to this committee just how important these emerging markets are?

I'll just quote what you said in Kitchener, because it kind of sums it up, I think, pretty good:

Emerging markets represent the greater opportunity for Canadian exporters. Since the recession, these economies have accounted for roughly two-thirds of global economic growth and one-half of the growth in global imports....This is where Canadian businesses must increasingly look for export growth.

How important is getting into these new markets and these emerging markets, and what would be the consequences if we did not get into these markets?

[Mark Carney]

First, thank you for reading my speech. It puts you in very select company, I must say. And thank you for the question, because you're absolutely right, in our opinion this is a critical issue and a critical economic challenge for Canada.

To provide a bit more context here, as noted in that speech, 85% of our exports go to slow-growing advanced economies. So it's not just the United States that is having its issues and working through its issues. But the broader set of export markets for Canada tend to be concentrated in slow-growth advanced economies, and only about 8% of our exports currently go to the faster-growing emerging markets. So there's a real opportunity, and that's one of the reasons.

That composition, in our opinion, and as our analysis indicates, is the principal reason why our share of global trade has gone down from 4.5% of global trade to about 2.5% of global trade over the course of the last decade.

Even though the dollar and competitiveness get attention, and it is part of the answer, the real issue is market structure. Where do we have market access, and to what extent are we focused on it?

The opportunities are considerable, in our opinion, and they extend well beyond the primary sector of our economy. In the resource sector, those opportunities are obvious and considerable, but it moves into manufacturing. The way supply chains have been reorganized, there are new opportunities. They move into a broad area that we would call sort of resource productivity: how you build building efficiency, power plant efficiency, clean tech, and others.

Eighty-five percent of these opportunities are in emerging markets. Some of it is Canadian know-how that can be applied. Managing data, managing other aspects, capturing more of the value-added from the resource side, again, are a huge opportunity for Canadian business.

When we look at where the Canadian economy is going, I think we have managed quite well through a very difficult time, as you indicated. But as Ms. Nash's opening question alluded to, one of the risks is that in managing through that process, household debt has gone up, and it's a process that cannot go on forever. We need a rotation of demand. It's not going to come to, I think, Cathy's question. It's not going to come from government. It has to come from business, and it has to come from exports.

Business is picking up now in terms of investment building productivity, but in building those export opportunities, whether it's Colombia or Asian markets, this aggressive trade strategy that is being pursued is consistent, in our opinion, with what needs to be done. We're not going to endorse, obviously, specific initiatives, but the broad thrust of this points to both a challenge and an opportunity for the Canadian economy.

[Randy Hoback, Conservative, Prince Albert, SK]

Actually you tied into something about the investment of Canadian businesses that is going on right now. One of the things we've heard in this committee is that we have great research going on here in Canada, but there seems to be a slowness in adapting that research into commercialization. Can you give us some insight into what we should be doing there to create that incentive for businesses to commercialize a lot of this research?

[The Chair, Conservative, James Rajotte]

Please give a brief response, and then we can return to it later in another round.

[Tiff Macklem, Senior Deputy Governor, Bank of Canada]

Sure, I'll give a brief response.

First of all, you've hit on a valid point. We have a fairly high level of public support for R and D. Where we don't do as well is in terms of private R and D and particularly the commercialization.

There is something of a puzzle there. It's not just that the private innovation is low, but translating that into measured productivity and actual increasing output per worker has been disappointing. We are seeing some improvement in productivity, but we have had a decade of weak productivity.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Hoback.

We'll go to Mr. Marston, please.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you, Mr. Chair.

Welcome again.

I'm going to muse over a couple of things before I get into the actual questions. You'll note the difference between ourselves and the government side. We had felt, in the situation we just went through with the interest rates as low as you referred to earlier in your presentation, that there was about $500 billion of capital on the business side kind of waiting, fearful of another bank credit crunch, and that it might have been a good time for the government to do some infrastructure work because of low interest rates.

Regarding your comments about going from 9% to 4% on credit cards, the last time you were before us you cautioned about the household debt. I'm concerned that perhaps to some degree that's card debt actually being maxed out, as opposed to people withdrawing.

I want to pick up on Mr. Brison's question. He was talking about the housing bubble. Are we in a housing bubble? If we are, relative to household debt, where does it fit in the equation? Is there something the government can do to shelter Canadians from this bubble, from the potential harm they face?

[Mark Carney]

Thank you for the question.

I wouldn't use that term. With respect to the level of house prices, I would note that there are local markets in housing. I'm going to come back to that.

Overall, the level of house price valuations across Canada is about four and three quarters times income. The historic average is about three and a half times income. That gives you a sense of the extent to which house prices have moved.

What's different now from the historic averages is obviously the overall level of interest rates. It's not just the overnight rate of the Bank of Canada, but it's five-year rates and ten-year rates, which are influenced by us but also influenced by global interest rates. I mean, the ten-year U.S. government rate is less than 2%, and that certainly has implications for the Canadian ten-year rate as well.

As I think we're all aware, mortgage rates are extremely attractive, and that accounts for some of the move up in valuation. The point we've tried to make is that you can't rely on those rates staying there forever, so an individual should size their debt appropriately.

The level of housing activity, particularly the level of condo activity in some metropolitan areas, is quite high. In fact it's reaching in Toronto to levels last seen in the late 1980s, even adjusted for population. We have some concerns over those developments.

The second thing is that even within that national average there are higher levels of valuation, by a variety of metrics. We don't just look at one metric. There are some firmer valuations in some metropolitan areas as well. There are cases where valuations are firm, shall we say, and there's probably more downside risk than upside risk to the future evolution of prices. That's an environment that warrants caution.

I'll go back to my earlier answer—I don't want to use up all of your time—and a variety of steps that have been taken that have slowed the overall pace of not just credit card debt but the overall pace of debt accumulation of households. It's slowed some of the developments in the housing market.

I think what we're reinforcing is that the interest rate environment is exceptional, and exceptions eventually come to an end.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

I want to go back for a second to the household debt and my comment a moment ago as to whether or not a fairly large portion of the population have perhaps maxed out their credit cards. I spend quite a bit of time in food courts and Tim Hortons listening to people and talking to them about what's going on in their lives. One of the things they're starting to say is that they feel maxed out.

I thought I'd toss that back to you, as much for information as anything.

[Mark Carney]

You're right. We're aware of this challenge. There are different segments of the population. There's a large segment of the population who carry some debt for which it is not a problem, but there is a higher proportion of what we would call vulnerable Canadians than there have been in the past.

The way we measure it is to look at what happens to their ability to service their debt today, but also going forward when interest rates go to more normal levels—and we publish some of these simulations—and one gets to levels of one in twelve Canadians. There are a lot of Canadians in food courts and Tim Hortons and around the country who are prospectively in that situation.

The message is one of prudence and caution, if you are in that situation. We are still in exceptional times.

There are still things that can be done. I would underscore that the Bank of Canada's core mandate is to achieve the 2% inflation target with respect to monetary policy. We have noted that given the state of the economy and the amount of slack from our underlying inflation, it may become appropriate to withdraw some of the considerable monetary policy stimulus. Any such decision would be taken with care and careful consideration of domestic and global risks.

There are a few clear messages there for Canadians.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Marston.

We'll go to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Mr. Chair.

Thank you, Mr. Carney and Mr. Macklem, for being here today.

Our government has acted very responsibly to ensure that our social programs are going to be there for our citizens when they need them. So I want to take a look down the demographic tunnel, if you will. That light that we see, which is getting brighter, is not the end of the tunnel but a freight train heading towards us. All level-headed people can't ignore the empirical evidence that our population is aging, and that there are going to be fewer and fewer workers to sustain the people who are going to be 65 years and over, as we move forward.

When the Old Age Security Act was brought in, in 1952, there were roughly nine workers for every one who was in retirement. In the seventies that went to seven to one; today it's four to one; and twenty years from now it will be two to one. Life expectancy has gone up. Our birth rate has gone down. We have taken, I think, a very prudent approach when it comes to the sustainability of our old age security system.

I'll just put my question out and you can take all the necessary time you need to answer. I just want to quote Deputy Governor Boivin, who spoke to the very august Economic Club of Canada just a few weeks ago. He identified three points of pressure resulting from our aging population. He said:

A smaller fraction of the population will be working and contributing to public revenues, and more people will be depending on their pensions, either public or private, to maintain their standard of living. Further, citizens require increased health care as they grow older, which will also place pressure on the public purse—fewer resources, more demand.

Could you please comment on all of that?

[Mark Carney]

Thank you.

That was the august Deputy Governor Boivin at the Economic Club.... No, I'll get the adjective in the right place.

This is a serious issue, as you know, which is why this committee and others have spent time on it. I think you personally have spent time on it.

Without question, this sharp shift in demographics is coming. In fact, even over the tail end of the horizon of our projection we see the impact, in that one of the big contributors to Canadian growth in the decade in the run-up to the crisis was the expansion of labour input, to use the economic term—basically, the proportion of the population that was working, and how much they were working. Part of that was a couple of very positive demographic phenomena. The economy was putting people to work, more Canadians were working, more women were entering the labour force, people were working for a longer time, and also we had the demographics at our backs.

Now that's shifting, and that is one of the reasons why our rate of potential growth in this economy has shifted down from about 3% in the early part of the last decade to about 2%. In fact, right now our estimate of potential growth for the economy in 2012 is 2%, and 2.1% in 2013 because of the lower labour input that's happening, which reflects demographics. As you alluded to in your remarks, and as Jean Boivin referred to, that is going to accelerate over time.

The offset to that can only be an increase in productivity, the productivity of those who are working. I shouldn't say that it can only be. There are some elements of people working longer, ideally by choice and not by circumstance. We do see some evidence of that. We continue to see, in fact in the employment performance since the trough of the recession, that employment of Canadians aged 55 years and up has actually been one of the stronger bits of employment growth that we've seen--again, more people working longer, ideally by choice.

This is a major issue, without question. Slower potential growth of the economy because of demographics will impact all forms of government revenue at all levels of government. This will occasion difficult choices that only you or the collective people in this House are empowered and qualified to make, those judgments about balancing off where the savings need to be with respect to productivity, other fiscal choices, inequality, and other concerns that you have to balance.

So you're absolutely right that it's a major issue. We've provided some simulations. We can do more if that's of use for the committee.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Adler.

Monsieur Caron.

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

Thank you, Mr. Chair. Thank you, Governor.

I want to go back to what Mr. Hoback said. He talked about the importance, for Canadian businesses, of being able to gain a foothold in emerging markets. Based on what I can see, we are facing a parallel problem that is almost as serious, meaning weak productivity. Over the past 10 or 12 years, Canada has been trailing the pack in terms of productivity.

Do you feel that the lagging productivity and weak growth we see not only in the United States, but also in all OECD countries, could be an obstacle that would make us look like non-contenders compared to our economic rivals?

[Mark Carney]

That is another good question. You are quite right. Weak productivity in Canada is decreasing our potential growth rate, the wealth of Canadians and both federal and provincial budgetary revenues. The question is knowing how to increase the growth rate for each sector in Canada. One very important aspect is our trade policy, particularly with regard to emerging markets. New markets allow our companies to increase their revenue margins. This constitutes increased productivity. Our companies can achieve economies of scale.

This must be accompanied by other marketing initiatives, ones that have a ripple effect, as well as research and development. The bank believes that R & D initiatives need to be pursued in the primary and university sectors, and by government. Finally, the level of domestic competition has long been an issue in Canada. If we can increase domestic competition, companies will increase their productivity. We feel this is also essential.

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

Your report discusses commodity prices, including oil, naturally. Higher oil prices in particular, combined with more intense Canadian oil extraction, resulted in—

over-reliance or more reliance on the oil and gas sector and slower growth and a decline in some other sectors. I won't say “de-industrialization”.

Could this trend be accelerated in the other sectors? If no corrections are brought to bear on the price of oil and natural resources, what sectors, aside from the natural resource sectors, could be helped or hindered by this fluctuating price?

[Mark Carney]

You have asked another important question and perhaps we may have more time to discuss it another time.

According to the bank, we are going through a period where commodity prices will remain high for a long time, this being caused primarily by the transformation of emerging countries. There will be some volatility, but commodity prices will remain high for a long time. Given these circumstances, clearly it is better to have natural resources. In addition, we need to adjust the economy. We need to develop products sustainably and derive the most added value that we can from the production of natural resources.

I can give a quick example. For the oil sands, one out of twelve suppliers in the upstream comes from Ontario, and you've actually seen an intra-Canada increase of about 40% in exports from Ontario to Alberta in that example. There's a lot more that can be done, and we should.... If we have a chance and if members want, we can return.

[The Chair, Conservative, James Rajotte]

Thank you.

If I have time I will return to that question and the question on commercialization. I know you wanted to address that further.

We will go now to Mr. Van Kesteren, please.

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

Thank you, Chair.

Thank you for coming, Mr. Carney and Mr. Macklem. I would like to mirror what has been said as well. I think you've been doing a really fine job. I think a lot of the stability we have in this country is a result of the work you've done. The confidence Canadians feel, the public's confidence, is probably as important as anything else.

We talked a little bit about resources. As a nation, we are richly blessed with natural resources, and having those is a significant driver. You've said that too, Mr. Carney, that those have had a profound effect on our economy, especially the oil sands.

One of the issues I hear about and I think all of us hear about in our ridings is the high dollar. There are those who claim--and we know this--that the dollar oftentimes mirrors the rising price of oil. There are those who claim that Canada's currency is nothing but a petrodollar.

Mr. Carney, you did say—I want to quote you—last week in a report:

It is far too simplistic to talk about [Canada's] dollar as a commodity currency, let alone a currency that moves consistent with one commodity. This is a much more diverse, complex economy than that, and this is one manifestation of it.

I wonder if you could tell the committee what other factors or complexities help determine our exchange rate.

[Mark Carney]

Thank you.

It's an important question. That's absolutely right. Let me start by acknowledging that because we are blessed, as you said, with immense natural resources, the prices of our energy exports and our base metals and other agricultural exports are all important factors, but they are only one set of factors that determine over time the fundamental value of the currency. If you look, for example, on the commodity side, if you look at the oil side, the correlation between the level of the Canadian dollar and the oil price has moved quite a bit over the course of the last ten years, from 0.8 or 0.9 to 0.5 if you measure on a WTI basis right now. That's the first point.

The second point I'd like to underscore is on something we highlighted in detail in the report. That is, that what matters a lot is what Canadian exporters actually receive for their oil. And as Brian and you know, we're currently in the situation, in part because of infrastructure challenges, where the price for western Canadian select is actually substantially discounted from the price you normally hear in the morning when you turn on the radio and they say the price of oil has gone up to, let's say, $120 or thereabouts. They're normally quoting the price of oil in the North Sea, because that's the most liquid internationally traded currency. We've reached a level in the last couple of weeks where our producers have been receiving $40 less than that. So even within oil itself there's a big difference. It's not as simplistic as analysts sometimes try to represent it as being. That's the second point.

I think your broader question is about the other drivers of currencies. I think we should all acknowledge that at any given moment, who knows? Currencies are driven by a range of things as the markets move, but in the fullness of time, the sustainability of the fiscal position is a determinant. The strength of the financial system is a determinant. The trade balance—the current account balance and the sustainability of that—is a determinant. Issues around risk—whether they relate to domestic debt, household debt—can be determinants from time to time, and the underlying competitive position of an economy is a determinant as well.

There are other factors, but if you run through that list, we score pretty well on most of them. But we do have issues. We have issues in terms of competitiveness. Our unit labour costs have gone up 65% against the United States, 80% against all our trading partners since 2000, so that's a real issue. Our current account is in a fairly large deficit at the moment. We have issues around household debt, as we've discussed. So our balance sheet is strong, but it's not perfect, and we always have things to work on.

Of course all of this is determined in an environment of relatives. The Canadian dollar moves in part because of what happens here, but also what happens elsewhere. Clearly, as with virtually every currency in the world but even more so for us, what really matters externally is what's happening in the United States and the relative performance there.