Evidence of meeting #30 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was data.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Stephen S. Poloz  Governor, Bank of Canada
Tiff Macklem  Senior Deputy Governor, Bank of Canada
Jean-Denis Fréchette  Parliamentary Budget Officer, Library of Parliament
Mostafa Askari  Assistant Parliamentary Budget Officer, Economic and Fiscal Analysis, Library of Parliament
Scott Cameron  Economic Advisor, Analyst, Economic and Fiscal Analysis, Library of Parliament
Randall Bartlett  Economic Advisor, Analyst, Economic and Fiscal Analysis, Library of Parliament

3:55 p.m.

Conservative

The Chair Conservative James Rajotte

Okay, thank you.

Thank you, Mr. Saxton.

Mr. Brison, please.

3:55 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

Welcome, Governor, and Deputy Governor.

I have a question on the potential of a housing bubble in Canada because the perspective outside our borders, from groups like the Economist Intelligence Unit or Paul Krugman or the OECD, is very different from that which I receive from Canadian banks. The OECD believes that we're vulnerable to a price correction, yet the banks are quite sanguine about the whole thing.

How would you explain the delta between the perception of housing valuations outside of Canada among these experts and the perception of the Canadian banks, and where do you fall in that, or who's right?

3:55 p.m.

Governor, Bank of Canada

Stephen S. Poloz

I would say that in a sense there's a degree of truth in all of that analysis, as usual. It's important that we start there.

3:55 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

What did you expect?

3:55 p.m.

Governor, Bank of Canada

Stephen S. Poloz

Many of the metrics that one uses to decide whether or not a market is overvalued may be quite relevant for what we would say are normal times. Then immediately one realizes that we are not in normal times. In fact, our response to the crisis has been one in which interest rates went to extraordinarily low levels, and part of that policy prescription is that people will buy more houses, or buy them sooner in their life cycle. That has, to a degree, bid up prices across existing homes.

That situation, as we discussed a moment ago, we believe is a sustainable one and is in prospect of a soft landing, provided the rest of our forecast comes true. Nevertheless, as we say in our report, this is a vulnerable situation. So, yes, if there were a downturn in the economy, a rise in unemployment, that sort of thing, we would be vulnerable to some sort of price correction in the housing market. The banks, I'm sure, when they say they are sanguine, it's because they know that the quality of their underwriting has been very strong, that in Canada people don't normally simply walk away from their home because the price may have gone down. Prices have gone down from time to time in the past. It would not be the desirable outcome, but it would be one in which the economy could be resilient.

3:55 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

Last week you told a Saskatoon audience that there's a growing consensus that interest rates will still be lower than we were accustomed to in the past. The Canadian Press ran a story, and the headline was “Canadians can bank on low interest rate environment for years to come”. Given that your predecessor seemed to be trying to pull the punch bowl back a little bit in terms of warnings on this, is there a risk that you may be pouring some vodka into it, and may be creating an environment that creates a bit of a hangover for Canadian families, if in fact there is the correction you describe?

3:55 p.m.

Governor, Bank of Canada

Stephen S. Poloz

Yes, there is a risk, and we're well acquainted with the risks, if I can classify them as low for long. So the possibility that there will be financial bubbles or unsustainable moves in housing, or increased debt levels, which are not sustainable long term, all those things come as a bundle, and we call them low for long risks. Those risks are growing the longer we stay like this.

We have to ask ourselves, why are we prepared to accept those risks? The answer is that we are not yet out of the downturn from the crisis. In fact, if we had not lowered interest rates and invited some of those risks, we would have had a much more severe recession. People's pension plans might have been hit pretty hard. It's all those kinds of things that would have been very negative for our economy. It is a risk, but it's one you deem acceptable, as opposed to some other risk which you would have instead if you didn't do it, if you tried to move interest rates back to a high level.

I think we have to keep in mind this full picture, and we are, in effect, balancing things as best we can.

4 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

There's been a call for more high-quality housing data, including from CIBC economist Benny Tal. Would you agree with Benny Tal that it would be helpful to have publicly available more high-quality housing data to help Canadians make informed decisions on the housing market?

4 p.m.

Governor, Bank of Canada

Stephen S. Poloz

I've been an economist for over 30 years, and I just love data, so if someone were to give me even more data on housing, I would eat them up and analyze them. We do have excellent data as it is. We believe we understand it, but there's no economic situation that couldn't be made better by having more data.

4 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

Could we make more of that data public? Would that be helpful? For instance, do we track foreign buyers and sellers in the Canadian housing market? How important is that to measure?

4 p.m.

Governor, Bank of Canada

Stephen S. Poloz

Well, I don't know if anybody really tracks that in the way we describe. It's something that could be investigated. If it were possible to bring those data sets to the table, we would be happy to analyze them.

April 29th, 2014 / 4 p.m.

Senior Deputy Governor, Bank of Canada

Tiff Macklem

There is some anecdotal evidence on that, but we don't have systematic data on who owns properties. We haven't found it. We speak to builders. We get a sense from builders what's going on in the market, but we don't have systematic data.

4 p.m.

Governor, Bank of Canada

Stephen S. Poloz

That's right.

4 p.m.

Liberal

Scott Brison Liberal Kings—Hants, NS

Maybe check on Kijiji or something like that; it's just a suggestion.

With the issue of aging demographics, and you've spoken to this in the past, how concerned should we be about the impact of aging demographics on our economy? Could we expect the same kind of dampened productivity growth in Canada with an aging demographic that we saw in Japan in the 1990s and Germany more recently?

4 p.m.

Conservative

The Chair Conservative James Rajotte

You have 20 seconds to answer that.

4 p.m.

Governor, Bank of Canada

Stephen S. Poloz

Well, I would recommend the speech I gave in Halifax, where we did talk about that in detail. Very quickly, the short answer is yes. Those drivers come from population growth and workforce growth, and that is easing back as we age.

Productivity is a much more complex thing that comes from the mix of what we do and how much we invest in it, so we do have the opportunity to have an offset.

4 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you, Mr. Brison.

We'll go to Mr. Allen, please.

4 p.m.

Conservative

Mike Allen Conservative Tobique—Mactaquac, NB

Thank you, Governor and Senior Deputy Governor, for being here today. We appreciate that.

I want to pick up on one of the things on the demographic side. In the monetary policy report on page 19, it talks about the GDP growth of around 2%. It also talks about “the growth rate of trend labour productivity being offset by a further decline in the growth of trend labour input, associated with demographic forces” which you referenced in your October 2013 report.

As you talk about this growth starting to pick up in the U.S. and other countries, with us maybe caught in the tailwind of that, do you see any impact on Canadian businesses in being able to actually hire these new workers?

4 p.m.

Governor, Bank of Canada

Stephen S. Poloz

Yes, as we get farther out there, we can say with some certainty.... The thing about demographics is we know with certainty that next year we will be one year older. It sounds trite, but putting those implications through an economic model is quite telling. It means the workforce out there actually begins to shrink in a way that means our trend line and growth are gradually slowing down to about that 2% level.

As I was saying just a moment ago, we do have the opportunity to grow our business in such a way that productivity adds to it, so that we end up with a stronger growth out-turn. But right now we already have a pretty strong uptick in productivity in our forecast, precisely because of where we are in the cycle and the investment uptick we're expecting to happen as the export recovery proceeds.

That along with the introduction of new companies, which is a process we think is just getting back under way and where the big productivity hits come from, should be enough to get us up to that 2%. We're hopeful that you could get 2.2%, or those kinds of things, with some luck. That's basically what you're looking for out there.

Bear in mind that the big numbers that we got used to happened because we had 50 years' worth of baby boomers expanding that workforce at the same time. We're just coming off that hill now.

4:05 p.m.

Senior Deputy Governor, Bank of Canada

Tiff Macklem

I'll add one thing. Right now we think there is some unused capacity, some slack, in the labour market. There are certainly opportunities for further employment to take up that slack, and for the unemployment rate to come down. Then, in our own report, we expect it's going to take about two years for that slack to be taken up in the economy.

Once you get back to what we think is around the economy's potential, then the growth rate of employment will be roughly in line with the growth rate of the labour force. That's when, if you want to get employment growth up, you have to get new segments of the labour force participating more fully—older workers, aboriginal workers, and younger workers. You're going to have to draw them more into the labour force.

Right now there is certainly some scope. Our own projection is that in about two years that slack will be taken up.

4:05 p.m.

Conservative

Mike Allen Conservative Tobique—Mactaquac, NB

Okay.

I was talking with the forestry sector today, and they've experienced somewhere around 2.5% in the compound annual growth rate of labour productivity from 2000 to 2012. Yet they're also looking at having 60,000 people by 2020 in their strategic plan. We look at the dollar going down, obviously making equipment more expensive in the U.S.

Do you see any of these challenges? Some of their major gains have been made by modernized equipment and improved process. Do you see the Canadian dollar settling out where it is being a challenge?

4:05 p.m.

Governor, Bank of Canada

Stephen S. Poloz

I really don't.... Well, on the margin, the answer to your question is yes. A 10% decline in the dollar makes certain bits of machinery that people import more expensive. But the dollar remains, in the historical sense, quite high relative to where we've been. Relative to, let's say, five to ten years ago, that equipment is quite a bargain compared with what it was when the Canadian dollar was much lower. I don't really think that's going to take too much of a shine off the investment story that we've laid out there.

However, the question about the shortage of workers is more meaningful to be thinking about. Any economy has the possibility of adjusting immigration levels and that sort of thing. Companies also react in different ways by spreading their production across different economies, capital-intensive production here in Canada, where labour is relatively scarce or more expensive, and some of it in other kinds of economies where the reverse is true.

They have an actual global model of production, such as in the garment business, for instance. That is what has emerged there. Even though employment in the garment business in Canada is much smaller than it was in the past, it's still one of the biggest in the world, and it's based in Canada. All the design and all that is still happening here.

These stories are complicated and they're individualized, so it's important not to make just a general comment like that.

I would say that the forestry sector has had a good record in terms of that productivity run. It's one of the ones where we would expect to see the demand side being influenced by that exchange rate. So, good news comes in.

4:05 p.m.

Conservative

Mike Allen Conservative Tobique—Mactaquac, NB

Governor, in your comments you talked about private demand and the potential for it to be better than what you actually think it might be at this point in time.

Have you done any sensitivity work in terms of what it could mean, and the draft it could create for Canada, if that private demand were up a little or down a bit?

4:10 p.m.

Governor, Bank of Canada

Stephen S. Poloz

That reference to private demand is an economist's euphemism. It was first called animal spirits by our old economist Keynes.

What we know is that there's always this unexplained layer of macro decision-making in an economy. It's a bit like a herd effect: everybody is optimistic, so everybody gets optimistic. You tend to get this extra kick to the economy. It's exactly when that happens that the economists all underpredict what's going to happen next. Of course, the reverse has been true for the last three or four years, because animal spirits, such as they exist, have been absolutely crushed by this experience that we've been through.

Our belief is that while many of our models are overpredicting what has been actually happening, at some point those animal spirits will come alive and we'll get that unified upturn. U.S. investment is the place where you might expect to see that first, because they've been hit so hard and they've been waiting this long, and all the ingredients are lined up. It's why that risk is highlighted in our monetary policy report. That's the one area where historically we've underpredicted at this point in the business cycle.

4:10 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you very much, Mr. Allen.

Mr. Caron, you have the floor.