Finance Committee on Oct. 31st, 2017

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

I understand. These are actually the Department of Finance's current figures on the level of private debt.

On another matter, in your report, you also talked about Canada's trade deficits in comparison to that of other countries. Do you have any additional comments about its possible impact on the Canadian economy? Are you expecting a trade surplus? My question is in order to get an idea of the impact of the deficit on the economy. Economically, is it a problem or is it a situation that is sustainable in the long term?

[Stephen S. Poloz]

The balance of trade is not really a very important variable in itself. It is a structural question rather than a cyclical question. I would say that our balance decreased 50% with the drop in the price of oil. That deprived our country of income of about $60 billion per year. Since that time, there have been adjustments in other sectors. Exports have increased in some sectors. Even the volume of exported oil has increased by about 25%. These factors are always in motion. Usually, it is a cyclical problem that is not permanent.

In any event, it does not represent a weakness for the country. At the moment, for example, it reflects a very strong economy, because we are receiving a lot of requests. Exports are beginning to reach a second level of growth. Basically, I can say that it is not a critical variable, to the extent that it is constantly changing.

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

You talked about the price of housing. Do you have statistics or data on the percentage of income that Canadians spend on their housing? I know that the percentage spent on housing is higher in some parts of the country. Do you have any data on the situation, any comments to make on it, or even any forecasts for the coming year?

[Carolyn A. Wilkins]

The data I have in my head are more about the regional distribution of debt. In total, we know that about 80% of Canadian household debt goes to mortgages and home equity lines of credit.

So it is very significant. Across the country, we see that the most indebted households, those whose debt is more than 450% of income, which is very high, are concentrated in regions where house prices are still very high, like Toronto, Vancouver and the surrounding areas. That is not surprising. It is also the case in Alberta because, beforehand, house prices were high there too. It is the case in a number of regions of the country where house prices are very high, and it comes as no surprise.

Certainly, in those regions, income could be higher too, because it corresponds to the cost of living. But when you look at the debt compared to income, it really is concentrated in those regions.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Thank you, both, for being here again.

Several of my questions are from the fall economic statement, which I know is not your report, but the Bank of Canada is quoted in it in terms of the Bank of Canada's business outlook survey. That's where some of my questions are coming from.

I want to talk specifically here with regard to investments. The fall economic statement talks about the Bank of Canada's business outlook survey showing there's a strong improvement in business investments in terms of intentions over the last year, and that the intentions remain in a solid, positive territory with capacity utilization rates of several industries currently close to their pre-recession peak.

I'm not saying that's what the bank said, but I'm assuming it's based on.... Well, they're saying it's based on your survey. Can you speak to that as well as the fact.... The statement in here is that business investment improvement may prove to be more long term and enduring in terms of continuation.

[Stephen S. Poloz]

Yes, the situation as I described earlier is one where we have the economy now, for the first time in many years, operating close to its potential. What one expects to see at this stage of the cycle, then, is firms that find themselves right at their full potential. In some cases, in fact, some 75% of those surveyed in the manufacturing sector say they're operating above their normal capacity level. That would be overtime, and that sort of thing.

When we get to that stage, companies generally begin to invest more, not just to replace equipment but to actually expand their capacity. It could be an upgrade in technology, in which case they might be able to expand their capacity without adding more workers, but very often it's not the case. What happens is that they actually add more workers too.

It is a really important stage of the business cycle for us. We haven't been here for some time. In most business cycles, when you have that upturn, you reach that capacity stage and the forecasters, ourselves included, have a trend line that's the economy's potential. We're saying that we're about at that trend line now.

However, what happens at this late stage is that companies add more capacity and the trend line tilts up for a while and gives us more capacity. When we say there's excess capacity in the labour market, that's where the economy has more room to grow. It means that those people, the discouraged workers, such as those who are working part time, can get a full-time job and those kinds of things. That adds to the economy's capacity.

By our surveys, the economy is primed and ready for this phase. We thought we saw the early signs of it in the first half of this year, and it's very reassuring to see. Despite the concern expressed almost universally about the uncertainty, going forward, about trade arrangements, despite that layer of uncertainty, companies nevertheless are prepared to invest. We take from this that their intentions would be even higher were it not for that uncertainty.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you. Actually, trade is exactly my next question, so that works out well.

Obviously, there is trade uncertainty and protectionist kinds of attitudes, certainly in the U.S. It's not only in the U.S., but in the U.S. it certainly impacts Canada.

This isn't your graph. It was provided by the OECD. It talks about labour productivity growth. Certainly in terms of aging population and demographics, Canada has concerns and we've talked about that here, but then I look at the United Kingdom and it's below 0.5%. It's probably 0.3%, but I don't know because it doesn't show all the numbers. Isn't there a huge opportunity through CETA, and I get it with Brexit with the U.K. specifically, but if there is a specific trade deal between Canada and the U.K.?

I see their labour productivity growth being extreme. If I were in the U.K., I'd be very concerned. Although there's uncertainty, is there not a huge level of opportunity and optimism, given the fact that Canada has changed between 2000 and 2007, and now it's not as significant when you look at the U.K. as one example?

[Stephen S. Poloz]

Right. It's a more complex question than it sounds, because productivity as measured there captures a lot of things in the economy. You could imagine if the U.K. was creating a lot of new jobs, but let's say the average job being created was in the service sector at a lower productivity level than in the financial sector, which is a high-productivity sector, or in manufacturing, which is high productivity. The mix of jobs can affect those numbers quite significantly.

I'm happy to say that Canada's labour productivity has picked up very strongly over the past year and a half to two years. Part of this is, no doubt, cyclical because it is the economy shaking off the collapse in oil prices and moving on to growth in other sectors, but it's also probably related to the thing I was mentioning a moment ago to your earlier question, which is that investment is picking up. If a company hasn't been investing, say, for five, six, or seven years, making their capital last, now every dollar they spend can have a big impact, because it's new technology or just upgrading things.

In addition, we now know that some companies can invest without there really appearing to be any investment. They do something in the cloud. They buy a service in the cloud instead of investing in the equipment themselves, and it looks as though the investment hasn't gone up, but we get the impact as if they had invested. The data are going to be increasingly difficult to interpret. StatsCan is all over this to help us understand it, but all that to say, we are at an encouraging stage here in Canada.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you. I actually have a short one.

This is not from your statement, but the fall economic statement talks about interest rates, which we've talked about here. One of the comments in the statement is that although interest rates are a risk—and we've talked about that here—most borrowers have fixed-rate mortgages so that can be absorbed easily.

I'm just curious. Does the Bank of Canada actually track and know and receive information from all of the banks in terms of how many in 2017 signed a five-year rate and how many in 2016 signed at that rate, so that you actually know how many people would be impacted in that given year by that given increase?

[Carolyn A. Wilkins]

The short answer is that, yes, we have fairly detailed data based on that. In fact, we've incorporated that in our model. Of course there are always behavioural differences, because some people still choose to keep variable. They don't always lock in. You have to think about the new homebuyers, who get hit immediately with changes in interest rates, but we're able to model that. You're quite right that about 70% of mortgages are fixed rate.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Governor and Deputy Governor, thank you for being here today and presenting to this committee.

I'd like to start with the sections in your report that talk about growth prospects particularly in the United States and their impact here in Canada in terms of both the general economy and monetary policy.

Governor, in December you raised the spectre of divergence. You were prepared to use different tools at different times in order to differentiate between and navigate the different effects on the Canadian economy vis-à-vis that of the United States. Obviously, you mentioned animal spirits in the United States right now, whether that be from increasing oil prices—they're much more stable in their energy security—or in reference to possible tax reform. Right now the American economy seems to be picking up.

Do you feel that American interest rates are going to remain the same or increase in the short to medium term?

[Stephen S. Poloz]

Central banks never comment on one another's policies. It's just not done.

But the Federal Reserve has telegraphed its intention over time to move interest rates higher, and it has these dots, which are essentially the forecasts of the members of the committee, which suggest that interest rates would rise over time but at an undetermined pace.

We have discussed divergence in the past precisely because conditions changed so much in Canada relative to in the United States. In particular, when oil prices fell, that was of course a negative for Canada but it was actually a positive for the United States, because even though they have an oil sector, they're a net oil importer, whereas we're an exporter. In those conditions, in 2015 the Bank of Canada cut rates twice while the Federal Reserve actually raised rates that year.

That's about as sharp a point of divergence as one can imagine, and that's why we have flexible exchange rates to deal with those kinds of shocks.

Moving forward, I would say, roughly speaking, that Canada has just now gotten to the stage it was at before the oil price collapse, almost three years ago now. The end of 2014 was when oil prices really started to crumble.

I think that over that two and a half years or so, the U.S. economy has gotten out in front of us, whereas we were roughly in the same place when the oil price did go down. Now we're that couple of years behind in the cycle, if you like, compared to where they are. That's why I was expressing the hope before that we will do something similar to what's happened in the U.S. They were able to grow beyond what most people thought was their capacity limit by pulling people back into the workforce, and that's exactly what we think will happen here. It's very hard to quantify. We just have to continue to watch it happen in real time.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

In terms of business investment, this committee, at least the subcommittee, travelled across the country on pre-budget consultations. We heard a lot about the government's small business tax changes, but another thing we heard is that business investment would flow out of Canada into the United States.

Do you feel that tax reform in the American context might cause the Canadian economy not so much costs but that you would see more flows out of the country? What kind of effect would that have?

[Stephen S. Poloz]

This was a risk that we highlighted in our January monetary policy report, very soon after the U.S. election. At that time, the talk was about very significant changes in U.S. tax policies, and the market had absorbed that more or less as fact. What happened over the course of the next six or eight months was that the market reaction was gradually peeled back as the realities of the political process unfolded.

We, of course, acknowledge that there is potentially a risk that there will be a tax change that somehow makes it, on the margin, more attractive for a company to expand its operations or create a new operation in the United States. This is exactly the same strategy that companies are mentioning to us today in response to the risk around NAFTA—that if NAFTA were to cease to exist or be dramatically changed, one way for them to hedge against that risk, since it may take quite a long time for it to become clear, is for them to expand their operation in the United States instead of expanding in Canada.

This is a risk that we face today. In our forecast, we have lower investment spending expected for this reason, this uncertainty, yet as I said before, on top of that there still seems to be a strong willingness to invest, and the actual numbers are showing it.

It's a mixed kind of picture. That's all I have for you.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

I am almost out of time, Governor. I appreciate your being here.

I just have a quick question in regard to different markets and how that works with inflation. Do you think that a lower cocoa bean price will cause more consumption of chocolates by Canadian households, and in turn create inflation in the job market for dental hygienists, increasing inflation and ending up with kids with cavities? Do you think we should cancel Halloween?

[Voices]

Oh, oh!

[Pierre Poilievre, Conservative, Carleton, ON]

That's a policy matter.

[Stephen S. Poloz]

I really don't think it's a good idea to cancel Halloween. I even brought a mask because I'm going to see my grandchildren afterwards.

[The Chair, Liberal, Wayne Easter]

Is that it, Mr. Albas?

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Was that a trick or a treat?

[Stephen S. Poloz]

I'll leave that to you, sir.

[The Chair, Liberal, Wayne Easter]

Okay. Next on my list is Mr. Sorbara.