Finance Committee on April 29th, 2014

[Stephen S. Poloz]

You've summed it up well.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Keddy.

We'll go to Mr. Brison, briefly please.

[Tiff Macklem]

I do feel the responsibility to add that what you saw in the United States is net worth changed quickly. The value of their houses fell, the stock market fell, all of a sudden their network fell, but their debt didn't go away and that created a problem.

You're right, but it doesn't mean there isn't a vulnerability, so that's why the vulnerability is there.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Brison, please.

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

Speaking of net worth and capital, if we look at Thomas Piketty's Capital in the Twenty-First Century, and the risk when the rate of growth of income on capital outpaces that of earned income, would you agree with Mr. Piketty that there is a risk of deepening inequality if in fact we have sustained low growth, and at the same time high returns on capital?

[Stephen S. Poloz]

I've downloaded the book to my iPad, but I've not read it yet. It's a very interesting historical hypothesis. From what I know of it, those fundamentals are the question. If the return on capital is historically persistently above the rate of growth of earnings, then you have what we would call a long-term wedge between those things, or disequilibrium, and it would mean this persistence, or perhaps even growth, in inequality. That's the conclusion he draws.

Our own belief, in the models we use, has a convergence of those things. That's why we talk about how the real long-term interest rate will be lower as those demographics come down. It's a hypothesis I need to understand better. It certainly would have very little to do with monetary policy. In monetary policy we believe we make a contribution here by keeping inflation low and stable, and that's the one thing we can do to allow people to make the right decisions.

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

As an economist, is there an economic risk, for instance, if Canadians aren't saving enough for retirement? Only 38% of Canadians participate in programs, for instance RRSPs. It's typically the same people who participate in TFSAs or PRPPs. It's roughly the same group of people. But for the majority of Canadians who can't afford to contribute, is there a risk that left to their own devices, Canadians aren't saving enough for retirement? If the thesis is that periods of higher growth in capital earnings versus economic growth would deepen inequality, is that not a risk to the economy?

[Stephen S. Poloz]

As you outline it, it would of course appear as a risk in these next few years as more and more people retire if they're not able to sustain their standard of living. In the big picture, it would suggest that investing whatever savings you do have in the capital markets will allow those savings to latch onto that return on capital, as opposed to the earnings strain. That's why the convergence is usually presumed in our long-term model.

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

A lot of Canadian families don't have any excess income to invest.

[Stephen S. Poloz]

My understanding is exactly that, that savings are not as high as we would like to see them in that basic context, yes.

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

I have a question on energy prices. Has the bank examined what the impact would be on the Canadian economy if we could get the world price for our oil, as an example?

[Stephen S. Poloz]

For our oil?

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

Oil, yes.

[Stephen S. Poloz]

It would mean a few dollars more per barrel. I haven't done the math on that, but it would be significant money.

[Tiff Macklem]

We have done calculations from time to time. If you say the spread of WCS to WTI is $40, which would be a pretty big spread—it's a lot smaller than that now—you multiply that by the exports of oil, you can get a pretty big number, well into the billions. If the spread is narrower, the number is a lot smaller. The key point is it's been very volatile.

[The Chair, Conservative, James Rajotte]

Why don't we ask them to send in some follow-up information?

Mr. Saxton has a couple of minutes, and then we want to move to the Parliamentary Budget Officer.

Thanks very much, Mr. Brison.

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

Thank you.

[The Chair, Conservative, James Rajotte]

Mr. Saxton, a brief round, please.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you, Chair.

I just have one last question that I'd like to ask the governor and the senior deputy governor.

In your statements today, you mentioned that Canada weathered the economic storm fairly well during the recession, as well as coming out of the recession. Relatively speaking, in fact, we did extremely well, but we're not immune to outside forces that could still weaken our economy. I'm interested to know what outside forces you think may make us vulnerable. Specifically, how will the tapering of quantitative easing in the United States impact our markets and our economy?

[Stephen S. Poloz]

Our vulnerabilities remain to the external environment, that's for certain. Our biggest one is that our export outlook is crucial to our getting inflation back to target, and that relies on the U.S. recovery being on all cylinders. If that were to falter so would the rest of our outlook.

We're also concerned about developments in China, where growth is clearly decelerating. We still think it would be around 7%, but it has financial vulnerabilities that make us concerned. As we talked before about Europe, especially it's a fragile recovery and it may interact with the Russian-Ukraine situation. Those are external things which we always must be mindful of.

In terms of the tapering, I don't see that as a major issue for us. The U.S. Federal Reserve is in the process of readjusting to a normalizing economy, and to the extent that they adjust to that, the normalizing economy will be beneficial for Canada. Yes, at some point, no doubt interest rates in the U.S. will begin to rise to become more normal. That will be coming in the context of rising U.S. growth and, we presume, exports from Canada into that higher growth, and therefore a stronger economy here. So when that comes at you, then it's not some external force, it's being all part of the same picture.

[Andrew Saxton, Conservative, North Vancouver, BC]

Finally, there was an economist in the United States today who predicted that the tapering of quantitative easing will have a significant impact on asset values in the United States. Do you share that opinion as well?

[Stephen S. Poloz]

I think tapering itself is fully priced into markets as we see them today. I don't think the rest of the tapering program will have any further impact on asset prices. The curve has it already priced out.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

Thank you, Chair.

[The Chair, Conservative, James Rajotte]

I want to thank the governor, Mr. Poloz, very much for being with us.

Mr. Macklem, again, thank you very much in your last appearance before this committee. We hope to see you again before this committee in another capacity. Thank you so much for being with us and responding to our questions. If there's anything further, please do submit it to the committee. We'll ensure all members get it.

[Stephen S. Poloz]

No problem. It's our pleasure. Thank you, Chair.