Finance Committee on March 12th, 2015

[Jeff Walker]

I couldn't speak to it; I'm not an economist. But if it doesn't last and all other things are equal, and if other economic indicators go bad, that's not going to be a good thing.

[Joyce Bateman, Conservative, Winnipeg South Centre, MB]

Thank you.

[The Chair, Conservative, James Rajotte]

I'm sorry, but we're out of time.

Thank you, Ms. Bateman.

Mr. Stanford, can you hear me in Toronto?

[Dr. James Stanford, Economist, Unifor]

I hear you loud and clear, sir. Can you hear me at your end?

[The Chair, Conservative, James Rajotte]

We can, yes. Thank you so much for your patience here this morning.

[Dr. James Stanford]

Not at all; I thank you.

[The Chair, Conservative, James Rajotte]

Colleagues, I'm suggesting that we take Mr. Stanford's five-minute presentation and then resume with questioning of witnesses.

Mr. Stanford, if you would, give us your five-minute presentation and then we'll go back to questions by members.

[Dr. James Stanford]

All right. Thank you very much, Mr. Chair.

I'm Jim Stanford, economist with Unifor, which is Canada's largest trade union in the private sector of the economy. We represent members working in more than 20 sectors of Canada's economy, at all stages of the value-added chain, if you like, from resources to processing, manufacturing, transportation, and services. Our members are feeling the impacts of the change in oil prices—good, bad, and ugly, if you like—in all of those different sectors.

I apologize if I repeat anything that was said by the witnesses earlier and I would refer members of the committee to the brief that we've prepared at Unifor for our members on the many and various effects of the oil price decline. It's on our website, and I think it was passed around to the committee this morning.

Obviously, a decline in oil prices by half is a major shock for the Canadian macroeconomy. In my judgment—and I actually worked, in another life, as an energy economist for a few years before I joined the union movement—prices are likely to stay at this level or perhaps go even lower in the medium term. I don't see any quick change in the global forces that drove the price down to the levels that they did.

Also, it's not at all clear that the current oil price is low by historical standards. In fact, it's about equal to its 40-year inflation-adjusted average, which suggests that the price in recent years was high rather as opposed to the current price being low. I think we should shape our response to this on the expectation that prices are likely to stay at current levels or lower levels for some time to come.

As you've heard in your hearings, there are many various and contradictory economic effects from the decline in prices. Petroleum production will not be quickly affected. In fact, Canada's production is going to keep growing in the medium term. We are seeing a major retrenchment of investment in new exploration and in development and construction projects in the petroleum sector. Since that sector accounted for 30% of businesses' fixed capital spending in Canada before the decline, this is a major problem for our economy, and there will be big spinoff effects from it.

The real GDP effect will be muted. Extraction will continue to grow, investment will fall, and some other sectors are going to experience benefits, including consumer spending, benefits for energy-consuming industries, especially in the transportation sector and to a small degree, as Mr. Myers just said, in manufacturing itself.

The impact of lower oil prices on demand in the U.S., our major export customer, is unambiguously positive, and that will benefit our economy. There will be some losses among manufacturing companies that supplied the oil and gas industry with manufactured inputs, but as a share of our total manufacturing activity in Canada, that supply chain linkage was small.

The most important beneficial impact, of course, will be the decline in the Canadian dollar, which is now back to its purchasing power parity level.

I stress that the dollar today is not low. In fact, the dollar is at its appropriate level, given relative consumer prices in Canada and elsewhere.

There will be significant benefits from a lower dollar, both immediate and in the longer run, on net demand for Canadian-made goods and services in all tradable sectors, not just manufacturing, but also tourism and tradable services.

It even helps the petroleum and resource sectors themselves to grapple, by cushioning some of the impact of the decline in world prices. We're seeing some benefits of that already. For example, Canada's exports of auto parts grew by 15% last year, which is a very encouraging sign for an industry that has experienced a very challenging decade.

There are some caveats regarding the beneficial impact of the lower dollar.

First of all, the Canadian dollar has not weakened universally. Our dollar has appreciated against the euro, which is a major competitor in manufacturing markets, by 15% over the last year. There has been no change in our dollar relative to the Mexican peso, and Mexico is of course the largest source of imported automotive products to Canada. Our currency has appreciated in the last year against the Japanese yen.

While the lower dollar is beneficial, it's clearly not a cure-all for our manufacturing problems. Partly because so much capacity was lost during the last decade, it's difficult for the industry to take advantage of this space that the lower dollar provides.

Second, companies don't know how long the lower dollar is going to last. I think it is important in this regard for government and the Bank of Canada to indicate their views that in the long run the dollar should not shoot back to levels well above its purchasing power parity; otherwise the potential positive impact of a lower dollar on investment decisions will be muted.

We would stress very much the need for continuing strong, proactive economic strategies to help key strategic sectors, such as auto, aerospace, telecommunications equipment, and also such strategic tradable services as digital media, in which we have a lot of Unifor members working. That will be part of the response.

I think the major economic challenge to Canada's macroeconomy from lower oil prices is going to be the fallout from retrenchment in petroleum investment, and part of government's response to that can be very strong support for increased investment, both public and private, in other sectors of the economy. “Public” means support for infrastructure spending. “Private” means partnering with industry to boost investment in key sectors such as those I mentioned.

I'll leave it at that, Mr. Chair, and look forward to discussion with committee members. Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Stanford, for your presentation.

We'll continue members' questions.

Mr. Dionne Labelle, you have the floor for six minutes.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Thank you, Mr. Chair.

Good morning to all the witnesses.

My first question is for Mr. Mendes.

When you presented your analysis on monetary policy in January, the assumption was that the dollar would be worth 86¢ in U.S. currency. However, this morning, the dollar is at 78¢. If you had known at that time that we would have a 78-cent dollar, would that have changed your approach to the bank rate? To what extent would that have changed your projections?

[Rhys Mendes]

Thank you for your question.

The key thing to keep in mind is that we make a constant assumption for the dollar. As you mentioned, it was 86¢. Financial conditions more broadly have eased after the monetary policy action in January, including the dollar. That, of course, has an impact on the economic outlook. I can't update you on that right now. We'll update it on April 15, at the next decision date, when we release our next monetary policy report.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

You will do it later on.

According to Chart 15 in the document you submitted to us, labour market slack is greater than indicated by the unemployment rate. There is a phrase here that contradicts some of what we generally hear from the government, namely that “long-term unemployment is still close to its post-crisis peak”.

Could you elaborate on this?

[Rhys Mendes]

Chart 15 is trying to take a broader view of the labour market than just what we get from the usual definition of the unemployment rate. We construct a measure that takes account of longer-term unemployment, underutilization of labour, wage increases. What we see is that several factors are keeping this broader measure of labour market slack above the level of the unemployment rate. Long-term unemployment is still close to its pre-crisis peak. Average hours worked remain low. The proportion of involuntary part-time workers continues to be elevated. Those factors are keeping this broader measure of labour market slack above the unemployment rate.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Thank you for your answer.

Mr. Walker, I enjoyed your rocket and feather illustration. Indeed, that is something our committee thought about this week. The price of oil and the prices at the pump do not move down at the same speed.

We proposed that a commissioner be tasked to examine this mismatch to see if the whole thing makes sense. We all remember that in 2008 oil was $148 per barrel and we were paying $1.48 at the pump. Now oil is at $50 a barrel. Last week, there was even an increase in the gas price at the pump. There is something about this pricing pattern that does not work. There is something going on.

[Jeff Walker]

Well, we don't know exactly what's happening, although we do know that some of the players who are in gas retailing are in the last few months showing higher profits than they have ever shown, so we would applaud the idea of doing some research into this rocket-and-feather effect. In fact, we at CAA were talking about commissioning our own study and putting it out in the public domain, to understand what's going on.

If you see what is going on in pricing in the U.S., it's not so much the rocket and feather. It looks as though prices have gone down by close to the proportion that oil prices have gone down. We think there could be something going on in Canada. We think an academic investigation into that question is probably worthwhile.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

In terms of corporate cash, we should remember that Mark Carney, the former Bank of Canada governor, said that companies were sitting on a lot of cash. His words were corroborated by Minister Flaherty. At this time, what is happening with corporate balance sheets, since we expect a recovery in the manufacturing sector? Have you noticed an increase in manufacturers' investment? If not, is the liquidity ratio about the same? Has it changed?

[Rhys Mendes]

Firms continue to face good financial conditions and to have solid balance sheets. That continues to be the case.

We see investment picking up going forward. We're hearing from manufacturers, when we talk to them, that investment intentions have picked up and so have employment intentions.

In addition, last year we saw Canada's non-energy exports pick up. We expect this trend to continue as a result of the stronger U.S. economy and the weaker Canadian dollar. As that happens, we expect investment to pick up. Capacity utilization in the manufacturing sector is rising. As demand continues to grow, that should translate into greater investment.

[Pierre Dionne Labelle, NDP, Rivière-du-Nord, QC]

Monsieur Myers.

[The Chair, Conservative, James Rajotte]

Speak very briefly, Mr. Myers.

[Jayson Myers]

I agree. Investment in advanced technology and manufacturing is at record levels, even though we have fewer companies in the field, so we are building capacity there. As I said before, I think it will be easier to find skilled workers in the manufacturing sector. That should also be positive and help to allow production to increase, but it's going to continue to take investment in new products, new technology, and in skills training. That's extremely important for maintaining competitiveness and growth.

Part of the reason we're not seeing gas prices come down is that some of the refineries are taking profit. They're using that profit to reinvest in better capacity and improved productivity also. I think that's a very important part of what we're seeing right now, as long as those investments are being made.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Cannan, please.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thank you very much to our witnesses.

Thanks, Mr. Stanford, for being here. There were some comments earlier about economists that you missed out on. They said that if you had five economists lined up, you'd get six different opinions. I'm not sure whether that's true.

I want to verify one of the comments you made earlier. The comment was about the impact of oil prices on employment. Maybe you could verify what your understanding is, from the present time and over.... We have heard from various witnesses that this low oil price situation could be with us for a couple of years. Maybe you could give us a prognosis, your understanding, for employment levels.

[Dr. James Stanford]

Well, the impact on both aggregate GDP and aggregate employment in Canada's economy will be a mixture of positive and negative effects, depending on what sector and what region of the country you're in.

The most negative employment impact of lower oil prices will be felt in the petroleum exploration, development, and construction sectors. This is where you're going to see immediate job losses in Alberta and in other producing regions as the companies dramatically reduce their new spending on investment, exploration, and development.

We'll see some positive impacts on employment in other sectors, those that benefit from lower oil prices, stronger consumer spending, the lower dollar, and the boost to demand in our U.S. trading partner. Those benefits tend to be more dispersed than the negative impacts in the petroleum exploration sector are, so they may not be as visible. But on a net basis, I would expect there to be very little net impact on the overall employment situation from the decline in oil prices.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Thanks.

I represent Kelowna—Lake Country. I've been there for about 25 years, but I spent the first half of my life in Edmonton, in the Alberta market, so I know that the decline has had a big impact especially in that region, as we've heard from other witnesses.

I want to know whether you still stand by this statement from your January 30 press release:

There is less chance of Ottawa reporting a deficit for fiscal 2015-16 than there is of the Maple Leafs winning the Stanley Cup.

We'll see how that goes.

[Dr. James Stanford]

Even though the chances of the Maple Leafs winning the Stanley Cup are even more remote than they were then, I fully stand by my quote, Mr. Cannan.

Thank you.