Finance Committee on April 28th, 2015

[Stephen S. Poloz]

Oh, absolutely. Historically, it's been a significant net benefit.

Pointing to the possible minor, if you like, negative side effect, which is, of course, the cost of capital equipment, that's important. It's not just capital equipment, but imports through the supply chain obviously go up in price at the same time. The entire calculus of the firm is affected by that exchange rate, but the most important thing is that it makes those companies more competitive when competing for new contracts. Existing contracts, which are already negotiated in U.S. dollars, yield a big increase in Canadian dollar revenue in those early months of that lower dollar.

[Andrew Saxton, Conservative, North Vancouver, BC]

How do you expect the strengthening U.S. economy to impact our export sector?

[Stephen S. Poloz]

Typically that's been the most important variable driving our exports, the strength of the U.S. economy. What matters also, what we discovered during this cycle, is not just the strength of the U.S. economy, but the areas of the U.S. economy that are expanding. The most important area, which was the last area to begin expanding, was investment in U.S. companies. That is a very trade-intensive segment of both of our economies. That's why we're starting to see—it's getting close to a year now—a good up-tick in all the things we export that are related to what businesses buy as opposed to what consumers buy. That is our strongest signal that this thing is going.

We're being cautious on this forecast precisely because over the last five years Canadian exports have not risen in lockstep with the U.S. economy. There was a growing wedge, and it was because of what we were talking about earlier, about companies that had exited the space during the weakest period. That disconnect is something that we assume for now is permanent, but we hope that by the creation of new sectors what happens in the next phase is that companies or products you've never heard of become the new leading exporters, and some of those other ones that were there before have disappeared.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

We have a growing economy, we have a lower dollar, and we have easier credit. What impact do you expect these factors to have on the non-energy industries?

[Stephen S. Poloz]

The non-energy economy, the export-oriented economy, is growing today approximately twice as fast as the domestic economy. That's just a broad measure of performance, over 4% growth, so we have a very good sign from that. All the ingredients that have strengthened over the last three months will add to this as we go forward. We are looking at growth rates for those non-energy exports in the 6% and 7% range. This is very significant growth for any company. It's not something we've seen in the last five years, so it's going to feel a lot different for those companies.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you.

Chair, how's my time?

[The Chair, Conservative, James Rajotte]

You have 30 seconds.

[Andrew Saxton, Conservative, North Vancouver, BC]

Very quickly, Governor, as you know the finance minister recently presented a balanced budget. Can you explain the benefits of a balanced budget for the Canadian economy?

[The Chair, Conservative, James Rajotte]

Very briefly, please.

[Stephen S. Poloz]

It's really not our role to comment on fiscal policy. Since we're the central bank, I would decline that.

[Andrew Saxton, Conservative, North Vancouver, BC]

Could you comment on the balance...[Inaudible--Editor]...have on the monetary policy?

[Stephen S. Poloz]

It's just something that we take into account. It's almost like arithmetic. We need to know what is the net effect of the budget on the economy before we can figure out what everything else will turn out to be.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Saxton.

Mr. Brison, please.

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

Thank you, Chair.

Welcome, Governor and Deputy Governor, to the committee.

A lot of Nova Scotians, a lot of Maritimers, in fact people across Canada, work in the oil patch in Alberta and Saskatchewan. EI claims in Alberta have grown by more than 20% for the last two months in a row.

You've said that the impact of lower oil prices will be front-end loaded in terms of the negative impacts. How long do you think it will be before the labour market impact of the oil shock will hit its peak?

[Stephen S. Poloz]

That's a very hard question. We know that typically labour market indicators are the slowest of all of our economic indicators to show these things. There's quite a lag between when you identify an event and when it's all over in the labour market. Anecdotally, we've seen less commuting. We can see that the Fort Mac airport has slowed down and so on. We know these effects will show up at some point.

At the same time, what we have to bear in mind is that the economy is actually quite strong in other sectors. The interior labour market indicators, the labour market performance, are improving and that suggests that it's easier to find a job today, another job, than it was a year ago, and that's encouraging. We have to take all of that into account, and in that context, I'm afraid it's not possible to forecast when that might peak.

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

Given that, and given Credit Suisse's recent report on the Canadian economy—Mr. Marino and Mr. Lang believe the oil shock effect will be a drag on growth for a longer period of time—are you still optimistic for economic growth resuming after a slow first quarter?

[Stephen S. Poloz]

I am. It's important to understand that we're not suggesting that the oil shock was just a three- or four-month event and then suddenly it's over. The investment in that sector in particular is going down by some 30% this year compared to last year. So that's an important drag for the economy, which persists. But we're suggesting that there are other areas of the economy that are actually really strong and will be buttressed by the lower dollar and the stronger U.S. economy, and those positives overwhelm the negatives starting in the second quarter.

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

Another negative would be that sales in Alberta's housing market have taken a really big hit. In most housing busts there's about a six-month lag between a fall in sales and when prices really start to fall. Are you concerned about Alberta's housing market and, particularly in some of the overheated markets, what's going to happen in the coming months?

[Stephen S. Poloz]

The housing market is one of our key financial stability risks; it's the headline risk in our financial system review. So the first answer to your question is, yes, of course we are concerned. Now that we have the shock that we're dealing with, we're watching very carefully how that's unfolding.

Perhaps Carolyn would like to elaborate.

[Carolyn Wilkins, Senior Deputy Governor, Bank of Canada]

Sure. Thank you, Governor.

Of course we're looking quite closely at the housing market regionally, and as you would expect, the housing market slowed in Alberta, although that seems to have stabilized in the most recent data. But at the same time we see signs of a soft landing in many other areas of the country. I think the exception to that would be Toronto and Vancouver, where those two markets are continuing to grow quite robustly. As the governor said, overall we see the housing market headed for a soft landing. When we look at previous crashes, we don't see that regional crashes tend to spread to other areas, and so we think that, for us, the most likely thing is a soft landing.

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

Do you predict a soft landing for Calgary's housing market, for example?

[Carolyn Wilkins]

I would say that we don't do any prediction for any particular market.

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

But you're predicting the housing market for Canada—you're saying a soft landing for the housing market—so you do.

[Carolyn Wilkins]

We’re not expecting whatever transpires in Alberta to create spillovers that would be, from a financial stability perspective, worrisome for the rest of Canada.

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

Are there potential policy actions that agencies, for instance CMHC or others, ought to be considering in anticipation of a potential regional housing crash in, say, Calgary?