Finance Committee on Oct. 29th, 2013

[Stephen S. Poloz]

Yes, in the sense that, during this past cycle, we saw very clearly that the traditional concentration of Canadian trade with the U.S., and the outsized cycle the U.S. economy went through, exposed us very much to that trade impact. The response of Canadian companies has been to work harder to diversify their export base, particularly to emerging markets, which are the faster-growing customer bases available to them. There is plenty of evidence that has been occurring, and it's a very good thing to diversify that demand.

The fact is, we'll always ends up being a very important partner with the United States. We'll always be exposed, but having a trade deal that opens up more doors simply allows for more diversification and will give us a stronger base for the future.

[Andrew Saxton, Conservative, North Vancouver, BC]

Our government knows that free and open trade is a powerful engine for growing the economy. That's why in the past six years we've concluded free trade agreements.... I think we're at over 40 countries now—it was 9 countries until very recently, but now I think we're at 42 countries—with which we have a free trade agreement in process or concluded. That's in addition to the foreign investment protection agreements, or FIPAs, that have also been entered into.

However, there are still some people who are doubtful about the need for Canada to become a more globalized trading nation and who sometimes are even going so far as to suggest that Canada should become more protectionist, along the lines of the Buy American trend. In your view, how dangerous would it be for Canada if we were to follow in that sort of vein and follow other countries in this protectionist trend?

[Stephen S. Poloz]

Well, I think I should offer a brief remark on this, since it's really not a monetary policy issue but more of a fundamental economic one on which the government has others more qualified to speak. But I am a free trader. I wake up in the morning believing that free trade is good, that competition is good, and that having access to markets is very good.

Historically, protectionism has actually been not good for economies. There's plenty of evidence of this. I would say that I wouldn't want to measure the extent of the danger that you offer up, because it's a very hard thing to answer, but I think that unambiguously having more scope for exploring trade transactions with other countries is very good for companies, and FIPAs are a very important ingredient. These days, the model of international trade very often engages the company in making investments—possibly small ones, sometimes larger ones—in the foreign markets in order to have a presence there. That presence gives them a stronger foothold into selling into that market.

The FIPA, that agreement, is actually a very important part of it. In fact, if we look at the free trade and NAFTA deal, it was the investment reassurance that companies received that really drove the big growth in trade in that deal.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay.

Do I still have some time, Mr. Chair?

[The Chair, Conservative, James Rajotte]

You have five seconds.

[Andrew Saxton, Conservative, North Vancouver, BC]

Okay. I have a very quick question.

Would you agree, then, that history has proven that protectionism is counterproductive and simply doesn't work?

[The Chair, Conservative, James Rajotte]

A brief response to that very large question, please.

[Stephen S. Poloz]

Yes.

[Voices]

Oh, oh!

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Brison, please.

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

Thank you, Mr. Chair.

Thanks very much to both of you for joining us today.

In your report, you state, “The level of average hours worked continues to be below its trend, driven primarily by youth underemployment.” Young Canadians today still have 224,000 fewer jobs than they did before the recession, despite a slight growth in their population. Of the new jobs created in Canada since 2009, only 0.5% have gone to young Canadians, despite their representation of 15% of the labour force. Earlier this year, TD Bank estimated that this extended period of youth unemployment and underemployment would cost Canada's economy $23 billion over the next 18 years.

For Canadians who are watching this today and for the many middle-class Canadian families who have young people who are struggling to find paid work, can you describe the impact that youth unemployment and underemployment is having on the Canadian economy?

[Stephen S. Poloz]

I would say first of all that we all acknowledge that what we've been through has been not a pleasant experience for all Canadians and that young Canadians in particular have borne, as you suggest, more of the cost. My personal belief is that the reason for this is that the vast majority of brand new jobs are actually created out of thin air. By that, I mean by brand new companies. Young companies that are getting going, that are in new technology spaces, or clean tech, or those kinds of things, generate the lion's share of brand new employment. Existing companies also create new jobs as they grow, but the big spurts of growth come from brand new companies. From 2008 to 2012, given the conditions that we were experiencing, there was no net increase in the population of companies in Canada; however, that population in 2013 has begun to grow again.

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

With these new companies like Cleantech, you would think young people would have a lot of opportunities to work in these new start-ups, particularly technology start-ups.

[Stephen S. Poloz]

I do.

I'm saying that I think the lack of growth in new company creation during this cycle, because of the conditions we've been in, has had a disproportionate effect on younger Canadians who often enter those kinds of jobs.

The good news, if I may complete that thought, is that we've seen a sudden increase in the population of companies in 2013 that is very encouraging. It's the first evidence we've seen since 2008 of what I would call natural growth. That is the growth process that is self-generating and self-sustaining and I do believe that this will bring more balance to the labour market performance as we go through the next couple of years.

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

CIBC Economics indicate that one of the drivers of high levels of household debt in Canada has been that Canadian families are subsidizing young people today who are having trouble finding work, and in your report you reference family debt. You say that slower growth of household credit and higher mortgage interest rates point to a gradual unwinding of household imbalances. It's $1.66 for every dollar of annual income that is now the level of family debt in Canada. It's still rising. I'm curious about your language, “gradual unwinding of household imbalances” when in fact family debt is still actually increasing. Wouldn't it be an unwinding if it were going down?

[Stephen S. Poloz]

Yes, that's correct.

We have growth in credit that has slowed quite dramatically overall. It's now at a point where it's roughly keeping pace with growth in income. Under our forecast what we'd expect to see is that this trend would remain in place and that total income would be growing as employment gathers pace. With those two things in prospect, we would expect to see that remain flat or edge down as we go through the next couple of years. In that context, underneath that, what you see then is that the mix is actually improving because there are people getting new jobs, new incomes, etc., and those who have already bought their houses are simply paying down their mortgage in due course.

[The Chair, Conservative, James Rajotte]

Thank you.

A very brief question, Mr. Brison.

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

What some people are referring to as the optimism bias are speculating that you're reducing the optimism bias and that you're setting a monetary policy on a path that could permit the weakening of the Canadian dollar. Would you agree with that hypothesis?

[Stephen S. Poloz]

We set the monetary policy with the goal of getting inflation back to target. As we said in the opening remarks, the fact that inflation has persistently been below target means that we have to take more weight on the possible downward biases on inflation, because that would mean that any negative inflation shock would bring us even further away from target as opposed to getting closer. In that context we've decided that we should no longer have an explicit bias toward higher interest rates. In that context it's true that markets have digested that and have sold the Canadian dollar a little, but it's not a very significant change.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

I want to welcome both the Governor and senior deputy governor here this afternoon before the finance committee.

First I want to commend the senior deputy governor on a wonderful speech he gave recently at the Economic Club of Canada. I've read it a number of times and I find it extremely interesting and enlightening.

I want to pursue a couple of angles here. One is the amount of money that corporate Canada is sitting on at the moment: I think corporate Canada is sitting on roughly $500 billion in reserves.

[Tiff Macklem]

Yes.

[Mark Adler, Conservative, York Centre, ON]

CIBC recently did a study—I know you're familiar with it—in which they said that “2014 will be a year in which both the US and global economies will surprise on the upside. In the past, without fail, such an environment led to a rebound in capital spending by Canadian corporations.”

In your speech, Mr. Macklem, you said that the U.S. economy is reaping the benefits of expansionary monetary policy, Abenomics and the three arrows in Japan..., Europe is showing early signs of recovery, and China has grown to a solid 7.5% growth rate. Could you comment on the prospect of Canadian corporations opening up the vaults and starting to spend that money as conditions improve?

[Tiff Macklem]

Yes, I can, and it actually follows nicely on Peggy Nash's question.

We were talking before about why exports have underperformed. Looking forward, there are some good reasons to expect that exports will come back and that the historical relationship with foreign activity will reassert itself. I outlined a number of those reasons in that speech.

It starts with the U.S. market, the U.S. economy. Headline growth in the United States is modest. By any measure they're going through a large fiscal contraction which is taking off headline GDP growth. If you look at underlying private demand, though, it has picked up, and as the effects of fiscal sequestration wear off going forward, you would expect to see U.S. growth strengthen. In many respects, the U.S. really is poised for stronger growth. That will be positive for our exports. As I mentioned before, the U.S. is, and is going to remain, our largest export market.

Secondly there's Europe. We certainly don't expect European growth to accelerate sharply. Europe is no longer contracting. It is now into positive growth, and combined with increased access to that market, that's going to be a positive for our exports. Japan, the third-largest economy in the world, which has been through two decades of stagnation, is now taking bold policy measures. Those are all positive for our export markets. So there are good reasons to believe that foreign demand will pick up.

To come back to the “hoarded cash” as you call it, the table is set for stronger investment. Firms have very good access to capital. They have prefunded; you can see that in their funding decisions. What they need to see is reduction in uncertainty of pickup and demand, and we think that will unlock their investment plans.

[Mark Adler, Conservative, York Centre, ON]

The overnight rate was maintained. How much of a threat during the economic period of recovery is core inflation? Is 2% still a good target, and is there a threat that core inflation may be a problem in the future as we recover?