Evidence of meeting #77 for Finance in the 41st Parliament, 2nd session. (The original version is on Parliament’s site, as are the minutes.) The winning word was economy.
A recording is available from Parliament.
Senior Deputy Governor, Bank of Canada
I think what we've said before is that there are many lines of defence. Policies that the Minister of Finance might find appropriate could be deployed, but certainly that would be the decision for the Minister of Finance.
Liberal
Scott Brison Liberal Kings—Hants, NS
With regard to manufacturing, many manufacturing plants already face capacity constraints currently. Adding capacity takes a lot of time. It's complicated by the fact that the low dollar makes importing the kind of equipment required to increase productivity to be more competitive actually more expensive.
Many companies ramped up capacity in the late nineties to take advantage of the low dollar, and then they got burned in 2002. Given that experience, are you still confident that manufacturers will naturally ramp up enough to save the economy in the face of lower oil prices?
Governor, Bank of Canada
Well, we are confident; the fundamentals are very strong—stronger, I would say, than what we are putting into our forecast. We're being purposely cautious on this issue, precisely because of what we've been through. Our models will naturally not work as well as they have historically, because there's been a structural change in the sector. In that respect, our confidence is very strong and of course confirmed by conversations with real companies.
Liberal
Scott Brison Liberal Kings—Hants, NS
You also said that the weakness of the Canadian economy is not necessarily indicated by top-line figures—the employment figures, for instance. The job market may be softer than actual employment figures. Do you have any comments on that?
Governor, Bank of Canada
What we think is that for the economy, because we have lost some capacity during the downturn, indicators of capacity show that we're almost at capacity at this stage...production. But we know that when you lose your job permanently from a closure of a company, you're part of the excess capacity in the labour market. There is more capacity in the Canadian economy measured through the labour market than there is through the production side.
That's the ultimate determiner: how much room we have to grow as those people get re-engaged in the workforce over the next two years.
Conservative
Conservative
Joyce Bateman Conservative Winnipeg South Centre, MB
Thank you very much, Mr. Chair.
Thank you very much, Governor and Deputy Governor, for being here this morning.
I want to get a little more clarification on one of your comments, sir. You indicated that oil will be negative in the short term, but in your comments you said that would be offset by other sectors that are doing quite well. What are those other sectors?
Governor, Bank of Canada
Those sectors are the export sectors that we identified last year as being intimately connected to the U.S. investment story. They are things that companies buy for investment in their companies. It's machinery and equipment primarily. It's building materials. It's packaging materials. It's metal products, in a wider range. It's aerospace. As well, one that doesn't fit that is pharmaceuticals, which is another strong growth sector. These are what we call the leading export categories. They account for over 50% of the non-energy export sector. These are the ones that are growing fast. The other half or so are growing moderately.
Then, of course, on the other side we have the energy exports. They're okay in volume terms, but the lower price means that we get less money for each sale.
All of that taken into account gives us relatively slow growth in overall exports this year, but underneath that will be very positive growth in these sectors which are selling to U.S. companies.
Conservative
Conservative
Joyce Bateman Conservative Winnipeg South Centre, MB
It would appear, then, that our government's focus on creating more trade deals, exploring other opportunities, is congruent with growth and achieving that.
Governor, Bank of Canada
Yes. These are the kinds of fundamentals that are not demand but are structural, and can potentially raise your trend growth rate because you capture more of the total global growth that's going on. For instance, in the context of the G-20 that I mentioned earlier, a couple of Canada's commitments are around those trade agreements, such as Korea and Europe.
Conservative
Joyce Bateman Conservative Winnipeg South Centre, MB
Now, you're talking about the G-20, and I just want to focus on that. You will be familiar with this, of course; I mean, it was in our throne speech in 2013, and our Prime Minister has said that he is targeting a 25% debt-to-GDP ratio by 2021. We're working on bringing that down.
How important do you think it is for G-20 countries to manage their debt?
Governor, Bank of Canada
That's a very difficult question, because the debt depends so much on what's going on in each individual country. As I said before, the whole global economy is pushing against these headwinds, which are the aftermath of the financial crisis.
The growth we see is not natural growth; it's happening because policy is stimulating that growth. We have not reached the stage where it's all escape velocity and everything is happening. The U.S. economy is the first, and may be there. The U.K. economy may be there. We may be approaching it. These are the sorts of things.... But other countries are still working hard at it.
Turning that into a pure fiscal question, I'm sorry, is just not my—
Conservative
Joyce Bateman Conservative Winnipeg South Centre, MB
But clearly there are some unintended consequences for world economies such as ours when certain countries have debt that is problematic.
Governor, Bank of Canada
Again, that is a complicated question, because it depends on why the debt is being incurred. If it strengthens growth, let's say in Europe—because they are running a deficit—that will unambiguously help us sell more exports and make our economy stronger.
It's a mixed question. I'm saying there is no clear answer to that.
Conservative
Joyce Bateman Conservative Winnipeg South Centre, MB
Fair enough.
Maybe this one's a simpler question, because we're working very hard as a government to reduce the tax rate on our small businesses. We are pushing it from 11% down to 9%, and by the time we're done, we will have cut the small business tax rate in half. Does this make Canada more competitive in world markets? Will that help make Canada more competitive in world markets?
Governor, Bank of Canada
Yes. That's the sort of thing that can make Canadian companies.... Anything that changes the cost structure in a company can provide a net edge, if you like, in competing for the next contract. It means translating that into a lower price for the foreign buyer so that another company or some other country doesn't get the transaction.
Of course, the Canadian dollar looms large in that arithmetic, because with a lower dollar you're able to decide whether to offer a 5% lower price, say, or a 3% lower price, and have a 2% higher profit and hire more people. All those things are complicated decisions. It varies a lot from company to company.
Conservative
Joyce Bateman Conservative Winnipeg South Centre, MB
We spoke about the growth underlying certain sectors in the economy and their growth potential and, in fact, in export markets. I'm just curious. Obviously the energy market is not one that is growing, but lower oil prices do mean a break, if you like, for consumers at the gas pumps. Is the Canadian consumer a winner with this? Are they losers? Are they winners? How does it impact income levels? Also, how does it impact consumer confidence?
Governor, Bank of Canada
I'll be very brief.
In any economy globally consumers benefit from lower energy prices, so there is the next step: do they spend the money they save, or do they save the money they save? That determines how it affects the economy, which makes it complicated.
In Canada it is doubly complicated, because some people lose their jobs—they're no longer on a project in Alberta or what have you—and their consumption goes down.
So we have to analyze the total effect, which is what is so complex about that question.
