Finance Committee on Oct. 30th, 2018

[Stephen S. Poloz]

I guess I have a certain amount of optimism that the labour shortages are more solvable with smart policies. I feel that infrastructure will be a continuing demand through the piece. We're going to need to think in positive terms about infrastructure all the time, because we're always going to have a shortfall or a deficit in infrastructure.

On the labour shortages, considering that there are over 500,000 vacant jobs in Canada, quite evidently people are still looking for work. This suggests to me that there is something pretty cool that we could do there. It requires some ingenuity, I guess, around labour market policies. It's beyond our mandate, but I feel that there is more ground and more low-hanging fruit there than there is in the infrastructure or the bottleneck side. In infrastructure we're just going to have to keep building it, building it and building it.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you.

On the issue of overnight rates, I want your views on how younger Canadians are reacting to the recent increases. People who were borrowing post-2009 have only known the economy at historically low rates. Our chair gave us an example. Do you believe that this generation is adequately aware of the unique position that we have been in for over a decade? Will they be prepared for the return of a normal rate of 3% or more?

[Stephen S. Poloz]

I share your concern. I will speak for myself, but in our communications last week we sought to put more emphasis on the notion that someday we're going to be back at neutral and that neutral is 2.5% to 3.5%, so that people will begin to digest that as an approaching fact. Of course, the pace is something that we have described before. It's unknown at this stage.

I have children who are adults, and I think they don't understand this, because they've never experienced the kinds of interest rates that you and I have in our lifetime. I hope they never do, because that was all about our inflation history and we worked very hard to fix it.

It was painful to fix. During the 1980s, when I was at the Bank of Canada as a young researcher, you could feel that. It was a very painful experience. That was when I bought my first house, and rates were 12% or 13%.

That goes into the rear-view mirror, and now you want people to understand that 3% would be just a normal thing, given the low inflation environment that we've established.

It shouldn't feel difficult. It shouldn't be a hard thing for people to service their debt at those kinds of interest rates. If, however, people have overextended themselves, given the low interest rates, we then have a transition issue. That is why we're putting so much emphasis on this and analyzing it so carefully and choosing our pace while we gather the data as we go through. We appreciate how difficult this is and how the economy will react.

I assure you it's top of mind—we're not losing sight of it—and I fully sympathize. We're going to be very careful about it.

[The Chair, Liberal, Wayne Easter]

Thank you all.

Mr. Julian is next, and then we go back to Mr. Fragiskatos.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

Thanks, Mr. Chair.

I want to come back to the issue of the neutral rate, 2.5% to 3.5%. We are experiencing, as we're all aware, the highest rate of family debt in the OECD. Even though it has levelled off, it is still astoundingly high. I'm wondering what the impacts are.

I understand that you can't give us a schedule, but if the objective ultimately is that neutral rate of 2.5% to 3.5%, what, given the rate of family or household indebtedness, is the impact of rising to that neutral rate ultimately?

[Carolyn A. Wilkins]

It is very difficult for the people who are highly indebted—there's no doubt about that—and the adjustment is difficult. When we look at the impact, we look at those individuals but also at the rest of individuals. In Canada, there is a large proportion of people who have no debt or very little debt—debt that is more manageable.

In some of our material, you can see the proportions. That highly indebted group is about 18% of those who hold mortgages. Then many people—30% of people—don't have any mortgage. We are really careful to think about how people are adjusting by looking at different vintages of individual mortgages, and we also build that into our forecasting models so that we can get a better idea—not just talk about it but in fact take it into account in our decisions.

When we do that, in what we've seen so far it has been difficult, but we can see that overall, households are adjusting, the economy is doing well and businesses are getting their investment plans in place. We think that incomes will grow over the period in which interest rates are rising, and that if there is ever a time to get back to normal, as the governor was putting it, it would be during this period.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

I live in a modest, post-war home. It was one of the dozens, hundreds, thousands that were built in New Westminster after the Second World War. At the time, I took out a modest mortgage. Now, today, when I look at my son, my nieces, my nephew, there is absolutely no way they could ever afford that—a modest bungalow. The housing prices in the Lower Mainland have reached that stage where there is simply no way for an individual on a regular income to ever anticipate having a family home, potentially a condo apartment, but in terms of a single-family home, it's impossible.

I'm wondering, when you talk about the higher rate of the 18% of those who are over-indebted, is it not also a generational thing? What we see is younger Canadians who have to take on phenomenal debt loads if they hope to have a family home. Older Canadians, generally, with a lot of exceptions, are doing better because the value of their homes or their investments have risen over the past few decades.

[Stephen S. Poloz]

I'll take a shot at that.

I totally understand. We have some world-class, vibrant, global cities in Canada. Compared to other world-class, vibrant cities, they're still not very expensive. I think this is something we have to reconcile. How do people of the second generation in Paris or London afford to live there? Because they certainly aren't buying houses of the sort you're describing. People adapt and they live differently. In the case we have here, we have a big country and people move somewhere else. In a digital economy, they can be in all kinds of different places and be very productive.

We don't know how all this is going to turn out. People of our age have a culture where we buy our house and we have our mortgage and we pay it off. Someday you're debt-free. Other people in other societies choose to rent their entire lives. We say, “Well, it's too bad they're not owning a home,” but they may rent exactly the same place that whole time. If you have a large debt and you're just servicing that debt your whole life and you never actually own the place, you're just paying rent to someone else. You're paying rent to a bank instead of to someone who owns the apartment.

Many of these models may look the same, but the finances are just different. We have a very innovative financial sector that I think can manage it for people. I don't like to pre-judge it as a problem, per se. The best contribution we can make to affordability is to keep inflation under control. Part of that is getting interest rates back to normal so that we don't have 20% or 30% price hikes in a market like Vancouver, which was for sure destroying affordability.

[The Chair, Liberal, Wayne Easter]

We're way over.

[Peter Julian, NDP, New Westminster—Burnaby, BC]

I just want to come back to the generational issue. Perhaps you could address that in terms of the higher level of debt. Do you find a generational difference among younger Canadians as opposed to older Canadians?

[Stephen S. Poloz]

Yes.

[The Chair, Liberal, Wayne Easter]

You squeezed it in, Peter.

Go ahead.

[Stephen S. Poloz]

Yes, at least in certain areas of the country.... In others, it looks just like when I was young, I find. In these cities that have become, in fact, global cities, they are just going to be much more expensive to live in, just because of what they are. It's the critical mass that builds and builds, and the rent curve, as we call it in economics, gets deeper in the middle. In those cities, it costs a great deal to live there.

[The Chair, Liberal, Wayne Easter]

Okay. Thank you. We're well over time.

We'll go to the other Peter, Mr. Fragiskatos. Then we will have time for one question with the Conservatives and then back for the last question to Mr. Sorbara.

Go ahead, Peter.

[Peter Fragiskatos, London North Centre, Lib.]

Thank you, Mr. Chair.

Thank you for being here.

Governor, you know London, Ontario, very well because you studied at Western University. That's where I'm from. That's the city I have the honour of representing in the House of Commons. As I think you know, London sustained itself for many years. Its economy was based on manufacturing, and that has changed now. When 2008 hit, many of our factories left. We are trying to transition and are doing well in that regard. There's a thriving technology sector that's come to our city. Our downtown is quite vibrant in that regard. There are many tech-based companies there. Even where manufacturing exists—and it certainly does—it's taking on a more advanced form.

I ask this question because I know you spoke in late September in Moncton on the issue of technological advances and disruptive technologies and what that poses for economies. I'm obviously interested in this from London's perspective, but for the country as a whole.

I'll quote from your speech, from the conclusion. You said, “technological advances represent opportunities to be seized, not a force to be resisted.” You continue by saying, “we know that in the long term, these advances will create more jobs than are lost, and create enough income to ensure that those who are affected can adapt and access new opportunities.”

I wonder if you can delve into that and expand upon that a little more.

[Stephen S. Poloz]

Yes, we have roughly 200 years' worth of economic history and technological change throughout that period that we can study in detail. Throughout that history, there has never been a technological change that has not created more jobs than it has destroyed. The term “creative destruction” that Schumpeter developed is very apt. When there is technological change, somebody's job is eliminated.

We take cases like the driverless vehicle that is going to eliminate truck drivers' jobs. It's going to reduce the number of truck drivers' jobs; that's true—gradually, of course, because it's expensive to buy those trucks—but it's going to create jobs for all those people writing the software and building the trucks, and of course, monitoring the traffic and all those kinds of things. That's an example I use.

Most of us think of growth as a bit like yeast, it's everywhere and it grows incrementally, but in the real world, growth is like mushrooms, they pop up here and there. The person who thinks of that mushroom makes out like a bandit because they have the new idea, and the destruction is around that mushroom.

What I was alluding to at the end is that the yield from that technological change is sufficient that we can always fund safety nets to help those who are left behind, and second, that as the income and the entire economy goes up, all those regular jobs such as building houses and maintaining them, etc., are also increased. Those are not giant leaps in skill sets away from the jobs that have been eliminated by this process.

We shouldn't be pessimistic about it. That was my main message.

[Peter Fragiskatos]

Sure, and I certainly agree. I'm glad our government has invested in retraining, for example, and made that a priority, but obviously there will be more to do.

I ask the question, not only because of my interest in it, but I think this is really a matter of concern for a lot of Canadians, especially young people, but in particular their parents, who are saying the pace of technological change is proceeding so quickly and are wondering what this poses for future generations. I'm glad you've shed some light on it.

Growth in the OECD is expected to remain relatively robust, but it will decrease according to the composite indicators that have been put forward. What does that mean for Canada, and for our monetary policy?

[Stephen S. Poloz]

We expect growth at the global level to moderate from what it is doing at the moment, and that's primarily because the United States has had this big bulge in growth, and quite naturally, it's at its capacity so it has to moderate.

Second, because of the trade actions that have been put in place, we're having these spillover effects, hopefully temporarily, but in any case, even if those trade actions go away, we will still be left with a moderation in global growth. We have that built into our forecast.

Canada continues to do well under that. We're just settling in at our potential growth rate and unemployment at a 40-year low and inflation on target. Right now, things are okay. We still have some rebalancing to do, but all the motion is there.

[Peter Fragiskatos]

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

We have time for one question from Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

You mentioned the ratio of income to debt service would increase by as much as 3% or 4% of gross income. When do you expect that increase will have been fully realized?

[Stephen S. Poloz]

It begins immediately for people who have floating rate mortgages, and then there are people who have two-, three- and four-year mortgages, so as we go through that, about half the people, thereabouts, have five-year mortgages. For them, it depends on when they started their mortgage. If they got it last year, they get to wait four years. If they got it four years ago, they're getting a renewal now. It's a very complex question, but given that the rate rises have already taken place, it takes pretty well two years for the peak effect to happen. Somewhere in 2020 we would have digested most of the effect.

As that process unfolds, we'll be able to monitor it in a dynamic sense. Our models are predicting all along the way...and I think as I've mentioned before, given our research on these segments of mortgage holders, our model is now about 50% more sensitive to interest rate movements than it was in the past. It is quite a big change, so we've already built it in to the numbers that you see for our forecast. We'll continue to monitor that quarter by quarter to make sure it's tracking as expected. So far it is, so we feel we have a reasonable understanding of it.

[The Chair, Liberal, Wayne Easter]

Thank you.

Before I go to the last question from Francesco, on page 7 of your monetary policy report, where you deal with trade concerns weighing on non-energy commodity prices, you talk a fair bit about the energy sector. You make this statement:

The effect on the price differential is being amplified by a faster expansion of oil sands production than of transportation capacity.

How serious is it that we have no access to market, other than basically rail, for some of that oil sands production?

From where I sit, there's a law of diminishing returns in terms of the railway capacity to haul other commodities when oil is taking up that capacity. We have to move potash, coal, all kinds of grains and oilseeds. There is an increasing problem as more oil, bitumen or whatever ends up on rail.

Do you have any thoughts on that?

[Carolyn A. Wilkins]

Clearly the transportation issues are what is driving the difference between the price of WTI and WCS. How serious is it? If you happen to be one of those companies that has the marginal barrel of oil that needs to be shipped by rail, you're getting paid a lot less for it. Also, you may be displacing some agricultural product. As we know when we talk to companies—and you know it too—they also have to wait and maybe have stockpiles of their product to ship as well.

About 93% of the oil is actually shipped by pipeline, so it covers a smaller proportion of the oil than one might imagine. As well, within that, some of the returns—the costs that are being paid for the rail—are actually accruing to Canadian railway companies, so not all of that is lost.

A cost that's outside how much I get paid today and how much I could get paid if the price were higher is really what it does to investment in the sector, where a price at that level may make it so that there's no business case to create further capacity. Certainly in our outlook, as you can see from one of the charts, investment in the energy sector is rather flat and slightly declining over the projection horizon because of that.

[The Chair, Liberal, Wayne Easter]

You have the very last quick question, Mr. Sorbara.