Finance Committee on Oct. 31st, 2017

[Raj Grewal, Liberal, Brampton East, ON]

That's okay.

[Carolyn A. Wilkins]

They edged up to meet the national average, in fact, because they were lower before.

[Raj Grewal, Liberal, Brampton East, ON]

What is the national average?

[Carolyn A. Wilkins]

The actual number...? I have 0.3% or something in my head. It may be slightly higher, but I think it's under 1%. I can get back to you with the actual number.

[Raj Grewal, Liberal, Brampton East, ON]

Perfect. Thank you.

[Stephen S. Poloz]

It's a decimal point of 1%. It's a low number.

[Raj Grewal, Liberal, Brampton East, ON]

Then why is there so much proactive regulation of mortgages?

[Stephen S. Poloz]

Our concern is, as I've described before, with the vulnerability of the economy. It's not that there's some form of wall there, but the problem is that the economy is more vulnerable to future disturbances like the oil shock, the kind of shock that's unforeseen. It's the vulnerability we've characterized in the past as being like a crack in a tree. The tree looks fine. It's all fine except when just the right storm comes along. Then the tree is on your neighbour's house when you come home. That makes for a bad day.

The point is that the economy magnifies those shocks, and we get even bigger rises in unemployment and financial stress in the financial system when debt is high. The main point of these things is to make sure that the economy is more resilient in the future, so that if you've been tested for a two-percentage point higher rate of interest and your circumstances would allow you to ride through a two-percentage point increase at renewal, then we can be confident that things that transpire between now and then are not going to upset the system.

It means that all the new debt that is arriving in the system now is making the system much more resilient than it was in the past.

[The Chair, Liberal, Wayne Easter]

Okay, we'll have to leave it—

[Raj Grewal, Liberal, Brampton East, ON]

Ten seconds...?

[The Chair, Liberal, Wayne Easter]

Let's take your 10 seconds.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Mr. Chair.

It's my last question. That was the positive angle of having proactive regulations on mortgage. The negative angle, many people would argue—especially my former colleagues on Bay Street—is that it slows the ability, especially for first-time homebuyers, to qualify and make that leap into the housing market.

[Stephen S. Poloz]

Yes, it does.

[The Chair, Liberal, Wayne Easter]

We have three minutes, time for about three more questions.

Before we move on—and you partly answered this question earlier to Ms. O'Connell—you said in your remarks, “The second source of uncertainty is the degree of excess capacity in the economy” and “slack remaining in the labour market”, and you used the example that “the participation rate of young workers is still below trend and average hours worked are less than we would expect.”

When we were on the road, as we have been for two or three weeks with the pre-budget consultations, we heard everywhere about the need for greater education, more skills training, matching skills to meet jobs, etc. I'm not asking you to suggest policy, but I'm asking you for your analysis. Is there a problem with skills in the labour market that you're seeing in your analysis? Is there more part-time work than there is full-time work? What analysis does the Bank of Canada have there?

[Stephen S. Poloz]

All of these things may be true, Mr. Chairman. We know there are structural changes in the economy and that there's extra growth in part-time working arrangements as opposed to full-time arrangements. Taking account of those things, it still appears to us there is excess capacity in the labour market. It is primarily a youth thing, but not entirely. We have five percentage points lower participation in the workforce by youths aged 15 to 25 than we had prior to the great financial crisis. Now I realize we're talking about different people now, because 10 years have gone by and they may be staying in school longer—which is all well and good, and the effect of a recession is often that people spend more time at school—but the fact of the matter is that we believe there's extra capacity there.

We've tried to quantify that in a separate paper, which was published alongside our monetary policy report. In fact, we simulate the effect. If we're able to get an extra one percentage point of extra economic capacity by this reintegration into the workforce—more conversion from part time to full time and reparticipation by those youths—that is a very significant thing for us to achieve, whether it's done by helping through other policies to make it easier, re-skilling them, or by other means.

All those things can help us, but it also means, to the extent that it occurs, that we will undershoot our inflation target one and a half to two years from now. Therefore, we have to watch for it happening, and hope that it will happen to a certain extent and that we can allow it to occur by watching it unfold and not nipping it in the bud.

[The Chair, Liberal, Wayne Easter]

Okay, thank you.

Mr. Dusseault.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

Earlier, I think you alluded to e-commerce and to the share of the economy it is taking. In the digital era, that goes without saying. E-commerce is profitable for Canadian companies, but it is also profitable for foreign companies that are flooding the market with poor-quality, low-cost products.

Do you have any data on e-commerce, specifically in retail but also in the cultural area, and on the extent it occupies in our economy today?

Are there any forecasts or concerns that you would like to share with us about the scale of it and the fact that our Canadian companies must compete with those companies?

China comes to mind, which sends cheap products to Canada at very little shipping cost.

Are you going to be watching these situations on your radar screen?

[Carolyn A. Wilkins]

We are certainly monitoring that type of situation closely.

Given our mandate, it will come as no surprise that we are more concerned with the effects and the process of inflation. But we are also looking at the possibility of transition costs in a labour market where the nature of employment changes with use, or even with the effects on people's income.

As for inflation, we conducted several studies that have been published for a week. They are interesting because they show that the effect of e-commerce on inflation in Canada does not seem to be very visible at the moment, even though, anecdotally, we might be led to believe the opposite. The number of Canadians embracing e-commerce is lower than in other countries, such as Sweden or other European countries. However, that could change, and it is true that it represents another kind of competition for Canadian companies.

As for employment, we are not currently seeing the effects of the digital revolution on productivity. It is yet to come, but we can well imagine that the nature of employment will change greatly and we have to be ready for it, both for people coming into the workforce and for those who are already in it. Training and education are very important factors. However, that is not part of the Bank of Canada's mandate. We just do studies in an attempt to better understand it all.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

Governor, you spoke about some of the reasons that inflation has been so moderate for so long. I think two examples you gave were low-cost imports and technology.

These factors are unpredictable. We don't know exactly what technology will do to our costs into the future because, by definition, all technological developments involve introducing something new and unknown. Over time, the low-cost imports may become more expensive as labour costs rise in the developing world.

Do you have any concerns at all that inflation in the medium term might be higher than the consensus view?

[Stephen S. Poloz]

Those, of course, are exactly the questions that keep central bankers awake at night, so I won't deny this. Most of the history of technological improvements—or, if you like, the effects of globalization or supply-chaining—on the inflation process has been to reduce inflation below what its trend line had been. This is what we call positive disinflation. It means that people are getting things for less money.

It would be odd for a central bank to try to boost inflation in other parts of the economy to try to average it out to be exactly 2%. It's the kind of thing we would normally see through precisely for that reason, and because it's unforeseeable, as you say. It's quite similar to an exchange rate effect on inflation, which is transitory one way or the other. We would see through it.

Our greater concern—and this is how the risks become balanced—is that we are now in a place where we're operating more or less at capacity. We believe there's extra capacity, but it has to occur for it to be relevant. If there isn't, it means that we'll be into the excess demand space, and inflation fundamentally will begin to pick up. We would see that in the labour market first. This is why we watch each of these things as we go along.

We're in that zone where those risks are truly two-sided, up or down on inflation, so of course we worry about both sides, but given our history—where we've been for the last number of years—we're much more preoccupied with the downside risks.

[Pierre Poilievre, Conservative, Carleton, ON]

One of the drivers of growth in the last couple of quarters has been residential construction. As consumers become tapped out and are no longer able to add debt in order to purchase housing, and as prudential measures pile on one another from both provincial and federal governments, resident housing prices are expected to moderate.

What impact do you expect that will have on the very large segment of our growth that has relied on residential construction?

[Stephen S. Poloz]

Sir, you're absolutely right that residential construction has been our leading growth sector throughout this very low interest rate period since the crisis, but our forecast is exactly that. It would become a much less important contributor over time to growth, and instead what we get is leadership from investment as firms expand capacity, as discussed earlier, and of course with that, the export behaviour, which is picking up in new export sectors.

That's exactly the shift in growth leadership or the rotation, if you prefer the term, in demand that we're expecting to see, and we have begun to see it this year. Housing was a negative contributor to economic growth in the second quarter, and we expect it would be probably flat again in Q3.

But the big numbers you saw were from all the other things that are growing.

[Pierre Poilievre, Conservative, Carleton, ON]

Finally, you commented on the ability of Canada's interest rates to diverge from American interest rates, but your commentary, I noticed, was on the divergence of trajectory and not on the actual numeric rates themselves.

How big a divergence is sustainable, given the massive integration of the Canada-U.S. economies?