Finance Committee on April 23rd, 2018

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

Will there be some piece to outline that particular policy?

[Stephen S. Poloz]

What we do is we track to see what its implications are. This is what we did when it first happened in Vancouver, and we did it in our last FSR right after the changes in Toronto, and the same thing with B-20, the other thing we talked about today. These are, to the very best to our ability, analyzed in granular data by segment of the population and by segment of the country to make sure we understand as well as we can.

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

I just want to touch upon employment. Monthly employment gains averaged 22,000 from October to March, with full-time employment increasing by 37,000 and part-time employment declining by 15,000 jobs. Now, roughly 40% of the job gains during this period came from private sector employers. Does it concern you that 60% of the job gains are not in the private sector?

[Carolyn A. Wilkins]

We care about how many people are employed, how many hours they're working, and what's happening to their income from a macroeconomic point of view. That job growth in the labour market has looked fairly healthy to us, and you do see from our surveys that employers in many sectors are finding it more difficult to find the right employees.

Nonetheless, if you take those numbers and dig into them, so you abstract from the public service versus private sector, and you look at hours worked—are they still working part-time but rather be working full-time?—and [Inaudible--Editor] of employment, you see that our summary labour market indicator, which is an adjusted unemployment rate, is still 0.5 percentage points higher than the actual measured unemployment rate, which is now 5.8. It's come down with the unemployment rate, but there are still indications of slack in the economy in some areas.

[The Vice-Chair, Conservative, Pierre Poilievre]

Madam Dzerowicz.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you, Mr. Chair.

Thank you to both of you for your wonderful presentations.

I have two questions. The first is tying productivity labour market and immigration. My riding of Davenport in downtown west Toronto has a lot of people in the building trades. Consequently, I get a lot of employers in construction saying to me, “Julie, it's wonderful that we have so much investment in infrastructure and affordable housing, but we have a great number of vacancies that we are just not able to fill.” I'm going to follow up my colleague's comments about the 470,000 vacancies. I wonder whether or not you're able to break down that 470,000 between skilled workers and maybe highly skilled workers, etc. That's part one of my question.

Second, I read from a very credible source that a lot of Canada's productivity has come from immigration. I want to know whether that's true and whether our current immigration levels are right in order for us to continue to support growth here in Canada. If we're not able to fill the 470,000 vacancies, what will the impact be on our economy?

[Stephen S. Poloz]

Those are a lot of interesting questions.

Companies are telling us is that the vast majority of vacancies are for skilled workers, and it's the lack of supply of workers with the appropriate skills that is causing that to be the case. As I said before, it's possible that it can be a geographic imbalance. We could have pockets of very skilled workers still in oil-producing provinces—Alberta, in particular—who have not moved to where the jobs are. This, of course, can be one of the reasons.

It sounds to me that it's become more general. If we look to where the growth has been, the highest growth rate and job creation has been in IT services—financial firms with 600 or 700 IT workers in them, whereas it was 200 before. There's been really big growth, and these are, of course, very high-skilled, very well-paying jobs. It may just take longer for the supply of workers to meet that demand.

One of the solutions, as you suggest, is immigration. Immigration levels, of course, are higher than they were before, and everybody knows where there are skills shortages in the market, and so there's a guidance thing that's happening there. I'm not sure what you mean by productivity from immigration, but in terms of how much our potential output is growing, it's true that a lot of our workforce growth is coming from immigration. It is very important to our growth and potential. There also tends to be a higher percentage of entrepreneurs among immigrants. They start their own businesses, etc.

That's all I have in terms of big statistics, if you like. I really couldn't comment specifically on your hypothesis.

[Julie Dzerowicz, Liberal, Davenport, ON]

Is there a difference between skilled workers and skilled trade workers, or are skilled trade workers part of skilled workers?

[Stephen S. Poloz]

I think skilled trade workers have specialty skills too, and so you often may need certification of some kind. If you're an immigrant who may be a qualified carpenter and you don't have a paper for Canada, you might have to go to community college for a refresher and get your certificate, or go through an apprenticeship. We have the means to bring these things about, to make supply more equal to demand, but the sorts of skilled workers who can create an app for your bank have a whole other set of skills. I hear about vacancies in skilled trades, and it's understandable given the infrastructure spending and a busy housing sector and so on. Those skilled trades matter a great deal, but they're not a giant leap away from many of the other jobs that are under pressure, in manufacturing and so on. What I like about the skilled trades is that it's possible for re-skilling to happen in a relatively short time. I'm optimistic that with the right dynamics and economy, we'll get there.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you.

[The Vice-Chair, NDP, Peter Julian]

Thank you.

Since the first vice-chair had to leave, I'm going to take over, as the second vice-chair.

It being the NDP's turn to ask questions, I'll ask my questions from this seat.

Thank you very much, Governor.

I wanted to come to the issue of wage growth and the overall family debt load, which you noted a number of times in your presentation. I thought that two of most interesting graphs in monetary policy report dealt with the following. Number one, in the English version on page 13, it speaks of wage growth, which appears to be just shy of 3%. Second, it then looks at slowing household credit growth, which continues to be remarkably higher than wage growth. I think that continues to be the dynamic we've seen in this country over the last decade or so, with family debt at profoundly record levels, but wage growth not in any way seeming to compensate for that high level of family debt. Despite the fact that household credit growth is slowing and wage growth is increasing, we're still seeing a worrisome gap, I would assume, between the level of family debt and overall wage growth. I'm wondering if you could comment on that overall.

[Carolyn A. Wilkins]

What we are seeing is a firming of wages, and as the governor explained earlier, it's a product of a labour market that is growing, and it's more in line, although still a little bit less than one would expect, given where we are in the business cycle.

You're right that what we've seen over the past few quarters is a continued slight uptick of household indebtedness as a relationship to disposable income, which is a function of both wages and the number of hours that people are working.

We don't just look at wages; we also need to look at hours worked, to get that number that we care about, and what we're seeing is a slowing in household credit. A lot of it is coming from the mortgages side, but there are also other forms of household debt, and that's slowing at a somewhat slower pace than labour income is increasing. But what you would expect with the economy continuing to grow is that those would become more in line, so we expect credit should continue to keep slowing, while labour income is continuing to rise.

Over time, over our projection, and over the next few years, we should observe that ratio of household debt to disposable income stabilizing.

[The Vice-Chair, NDP, Peter Julian]

You're expecting that is more an issue of years, in terms of turning around what I would describe as a toxic situation, where family debt increased and wages did not keep up.

[Carolyn A. Wilkins]

If you look at that chart over a longer period, you see that household debt to income has been rising for quite a number of years—in fact, since the early 2000s—and so what took such a long time to build up is going to take a bit of time to wind down. You have to remember that the buildup is accompanied by the purchases of assets—housing, for the most part—and so there's another side of that balance sheet that households have, and the net worth numbers would show a slightly more reassuring story.

[The Vice-Chair, NDP, Peter Julian]

Thank you very much.

I have to interrupt myself, since my time is up.

Mr. Sarai, it is over to you.

No, actually, it is Mr. Sorbara's turn.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Actually, Mr. Sarai will go first, and then I'll follow.

[Randeep Sarai, Liberal, Surrey Centre, BC]

Thank you, Chair.

Thank you, Governor.

I'm a member of Parliament from British Columbia, and as you may appreciate, B.C. has been flooded with foreign investment, particularly in the housing sector, to the tune of almost a billion a month. That's the number that was recorded before. There are now several federal and provincial measures designed to slow the rapid rise in home prices. I'm wondering how the adverse effect of that starts slowing things down. It seems that it's having some effect but not as much as it has had in Toronto.

Would there be an economic impact in terms of job losses in the construction sector and related fields outside of that, or is the demand so exceeded that it will actually bring an equilibrium?

[Stephen S. Poloz]

My perception is that demand for housing remains very strong, throughout Canada, actually, not just in those markets, and therefore, the pace of construction and the jobs in construction are basically determined by the demand. The supply is the constraint that prevents it from being faster.

I think the main result of the interventions that have happened to the market itself has been to take some of the extrapolative expectations out of the market. For us, it's very unhealthy to hear people say they've got to buy a house because they're afraid of missing out. They wanted to buy one in two years but they need to do it now. And they can.

Even worse are folks who have paid down enough of their mortgage that they can then borrow enough to buy another house while it's being built and then plan to sell it when it is built. That's just to earn a return. That's speculative.

When people think there's nothing that can go wrong in that, then you know expectations have become extrapolative, and that's a very unhealthy place for people to make lifetime decisions.

In that sense, at the time I thought that could be just a temporary effect on the market, but at the same time it has an important disruptive effect on those expectations, and therefore it has a longer term positive impact.

[Randeep Sarai, Liberal, Surrey Centre, BC]

I'll pass to my colleague Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Sarai.

Thank you, Mr. Chair.

Governor and Senior Deputy Governor, along with OSFI, our government has put in place a number of measures for the housing market. I like to think that the quality of debt now being assumed by consumers in purchasing a home has improved. I look forward to reading and seeing the June financial system review. Can you comment on measures to date or what you're seeing in colour commentary, if I can use that term, of the quality of indebtedness Canadians are assuming ex post the measures we and OSFI have introduced?

[Carolyn A. Wilkins]

What we have the clearest view on are the changes that were made in 2016 that affected insured mortgages. It was the same kind of change that we saw put in place in January of this year, with major part being that households looking for a new mortgage loan would have to pass a stress test of increased interest rates so you could tell that they could withstand that. One of the indicators we looked at, which had been giving us cause for concern, was the share of mortgages that had a loan-to-income value greater than 450%. If you're leveraged greater than 4.5 times your income, you're less resilient if interest rates increase or you lose income because you're working fewer hours.

We saw this ratio, which was around 18% at the time of the measure, fall to well under 10%. I think it's probably now between six per cent to eight per cent. That change in the composition of debt, in the new mortgages that are written, means that over time the quality of the debt out there should continue to improve. We expect a similar effect from the most recent changes, which, as you know, are related to uninsured mortgages. It's too early to have those data, but we expect to get them as the year progresses and to be able to follow them over the coming months.

[The Vice-Chair, NDP, Peter Julian]

Thank you, Mr. Sorbara and Mr. Sarai. Thank you, Ms. Wilkins.

Mr. Albas, you get the last word.

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

Thank you, Mr. Chair.

I certainly appreciate the conversation we've been having thus far. Obviously, the bank was established to ensure price stability and stable economic growth, so, again, there have been some changes in the way the bank looks at inflation. I believe that recently there's been different way of approaching it to see what indicators better track inflation over a longer period of time. Obviously inflation is up in certain areas, and yet interest rates have not gone up.

For the people at home, could you please reiterate why the Bank of Canada made its decision the other day, and why this new method is going to benefit Canadians?

[Stephen S. Poloz]

As you know, the inflation rate tends to be very variable. It's influenced by many short-term things. We're always looking for a better way to filter out those variations, especially since, as a policy-maker, I know that we can only affect inflation 18 months to two years from now. It's our forecast of where it will be two years from now that determines whether or not we need to do something now. We have to see through all the noise and the data, so we created some core measures, which were intended to strip out the noise, and we published them and said we're going to follow them, and they promptly fell well below two per cent and, of course, gave rise to concern that maybe our modelling was off.

So we did a lot of extra modelling over the past 18 months or so, and sure enough, as expected, those measures have converged very close to two per cent over the last six to eight months. That has confirmed for us that we have the right models and the right framework. That means our forecast for inflation, which two years from now is two per cent—exactly on target, or within 0.1 per cent of target—is well within the range of one per cent to three per cent. This means, given what our outlook is, that we have monetary conditions roughly where they should be. In that context, the fact that inflation is rising above two per cent for now is due to temporary factors, and we can see through them. We explain that to people so they can keep their expectations firmly at two per cent, and the economy should continue to run nicely on that.

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

When I return to my riding, one of the benefits of being able to go home and chat with people is that I hear where they're at.

For the first time, Governor—and I'm actually going to direct this question to the deputy governor—I've had different conversations with constituents, different people with different backgrounds, about cryptocurrencies.

I do know you've made some statements recently and that there is a need to have a broader contextual look at it, not just from a Canadian viewpoint but also from an international one. You also made a distinction between a cryptocurrency itself, or what's broadly referred to as a “cryptocurrency”, and have called them “crypto assets” instead.

Could you please give an explanation to the Canadian public why you're using those terms and what, from the Bank of Canada's position, should be the proper way to start discussing these things? Many people are talking about them in terms of speculation or gambling. Some people are looking at them in terms of investments. It would be helpful to have some context for them.