Finance Committee on April 30th, 2019

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you very much for being here, Governor and Deputy Governor. Whenever you come here, like my colleague Mr. Dusseault, I take advantage of the opportunity to put questions to you about the indebtedness of Canadians.

When I go door to door in my riding, that is a question that comes up often. The advantage we have here is that you provide us with very clear explanations about the effects of this debt on the economy or the Canadian financial system.

Are you optimistic with regard to the stabilization of Canadian household debt, or are we still in a zone where we must be careful?

[Stephen S. Poloz]

As you said, this issue comes up constantly. Since last year, we have seen some encouraging developments.

First, obviously the new mortgage rules have changed things in a positive manner.

Secondly, household debt was on the upswing for a long time because of the increase in the cost of homes, particularly in Vancouver and Toronto. That is the factor that contributed the most to growing debt. However, that increase has declined considerably recently.

Third, the growth rate of debt is generally lower than the rate of nominal income.

I hope that this has already peaked and that we are entering a period of adjustment for households. This period may extend over several years, perhaps even 10 to 20 years. It is a gradual process, of course. That said, the situation is much more favourable than two years ago, that is certain.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Let's talk about mortgages and the measures included in the 2019 budget for first-time homebuyers, as well as the CMHC provisions.

Do you see this with a favourable eye? What effects will this have on the Canadian economy, and especially on the Canadian real estate market?

[Carolyn A. Wilkins]

Our role is really to evaluate economic effects.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Yes.

[Carolyn A. Wilkins]

It is up to you to make the difficult political decisions.

In fact, it is a bit soon to evaluate the economic effects because all of the parameters have not yet been clearly established for the moment. This is what we underscored in our monetary policy report. We will know more next fall.

Certain factors will be taken into account. We already know that certain program parameters will indicate to what extent the effect will be widespread.

For instance, limits have been placed on the ratio between mortgage debt and income. There are also limits on the loan amount one can obtain. In addition, if you are not buying a new house, the applicable figure is 5%, while for a new house, it is 10%. All of these parameters indicate that access to mortgages will probably be broadened, which corresponds to the objective of the program. Next fall, when we have all of the parameters, we will be able to determine more precisely to what extent the objective has been attained.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

This may be my last question. This can be compared somewhat to what happened with the first-time home buyers assistance programs.

Do you think that the new price on pollution will have an inflationary effect, after taking into account the rebates that will be granted to Canadian households in the four or five provinces concerned, or do you think that it will have a neutral effect on economic growth?

[Carolyn A. Wilkins]

As for inflation, we calculated the direct effect, as we do for all the policies that affect inflation. We had to consider the effect of the tax on gas, oil, natural gas and fuel. According to our estimates, there will be an increase of 0.1 percentage points on the inflation rate in 2019. In 2020 and following years, the increase will be 0.05 percentage points. It will be lower because the increase will be lower. There will be an effect on inflation for a year, and afterwards there will be an effect on the level of inflation.

As to whether there will be effects on economic growth, there are complications that prevent us from determining that.

[Stephen S. Poloz]

It's certainly possible that it may affect investments in high carbon emission sectors. That is a potential consequence, and I would even say it is probable. When people have to pay a tax, this may encourage them to reduce their carbon emissions. It may also lead to lower investments in high carbon emission sectors.

The question is what will be done with the money that is collected, because this will encourage investments in other sectors. It's very difficult to analyze ahead of time.

As for me, I'd say that it will probably be a slight or neutral effect, but we will have to wait and see.

It is comparable to other factors that could affect the economy's potential; we can't really foresee them. We have to assess both sides of the coin and the situation eventually becomes clear.

In the final analysis, this will probably not have an effect on the economy, first because funds are being provided to absorb the costs to the economy.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you.

[The Chair, Liberal, Wayne Easter]

Okay. We will have time when we come back for about four questions in five-minute rounds. We'll have to suspend, Governor. We'll probably be back in about 15 minutes. You'll get an absolute break with nothing to do. Can you imagine that?

The meeting is suspended.

[The Chair, Liberal, Wayne Easter]

We'll reconvene with the Governor and deputy governor of the Bank of Canada and start where we left off. We have time for four five-minute questions before we have to go to the Parliamentary Budget Officer's testimony. We'll start with Mr. Poilievre and then Ms. Rudd.

Mr. Poilievre, the floor is yours.

[Pierre Poilievre, Conservative, Carleton, ON]

Yes, it's normal for government leaders to make rosy predictions, and when they don't come true, to blame them on exterior factors in faraway lands.

I'm looking at your comments from the monetary policy update, Mr. Governor, and you attributed some of the downgrade to a structural matter, which was global oil prices. You compared oil prices to where they were five years ago. Of course, when you compare anything to a peak, you're going to be down, but it turns out oil prices are not low right now. Oil prices are actually quite high by historical standards. If you convert them into Canadian dollars, they're almost average for the last roughly 35 to 40 years. From 1980 on, we had an incredible expansion of Canada's oil sector at those average, inflation-adjusted prices.

What you didn't say in this remark—which astonished me and I'm sure many others—is that it has nothing to do with global oil prices, which are high. It has to do with reaching the market. I know it would have been politically inconvenient for the government if you had pointed out that market access, and not global oil prices, is the problem. Given that your job is not to help the government but to assess the facts, why did you attribute it to global oil prices rather than market access, which everyone agrees is the real problem?

[Stephen S. Poloz]

Sir, are you referring to our monetary policy report, or to my opening—

[Pierre Poilievre, Conservative, Carleton, ON]

Your statement on April 30 that you presented....

[Stephen S. Poloz]

My opening statement here this morning...?

[Pierre Poilievre, Conservative, Carleton, ON]

Yes. It was the same one you did in your press conference roughly a few days ago.

[Stephen S. Poloz]

Yes. There's quite a bit in our monetary policy report, not just this one but in the previous one about those constraints, transportation constraints and market access constraints. Various terms are used and quite a bit of analysis has been done by our staff on what the implications of that are. Today what I was drawing the distinction between is that yes, oil prices are indeed quite strong compared to where they were just four or five months ago. However, what firms are telling us is that they are still planning to invest less. The reason they're investing less is because of the uncertainty around market access.

That's what I was referring to in today's statement.

In the wake of the big oil decline in 2014-15, we basically had about a 50% decline in investment intentions. This only makes sense because investment intentions were framed around much more expensive oil. This year we are monitoring another 20% decline in investment intentions based on the situation. It's not necessarily just about oil prices but the situation, which I think is primarily about market access issues.

[Pierre Poilievre, Conservative, Carleton, ON]

Right. It's just that I am looking at your statement from today and it mimics the statement you made publicly, where you said continued adjustments.... I'm going to read the whole sentence: “Some of this downgrade is likely more structural than cyclical in nature, as it represents the continued adjustment of the sector to global oil prices of US$50-60 per barrel”.

[Stephen S. Poloz]

Yes.

[Pierre Poilievre, Conservative, Carleton, ON]

Again, I'm sure the industry would love to go back to the unusual peaks of 2013 and 2007 but those are anomalies. We're actually dealing with a fairly strong global oil price. It's not a global problem. It is a homemade one.

Another comment you made—you were giving an explanation for the poor economic growth Canada experienced in 2018 and the low forecasts for 2019, even more dismal—was about the U.S.-led trade war. Now I'm against all trade wars. I am a proudly ideological supporter of free trade in all circumstances, but what I find interesting is that the United States is growing almost twice as fast as Canada at 2.9% in 2018, and China is growing three and a half times as fast as Canada at 6.6% in 2018.

Given that they are our two largest trading partners, that they constitute 80% of our trade and that they are the principal participants in this so-called trade war, how can we possibly blame Canada's dismal growth on those two countries when their growth is significantly higher than ours?

[Stephen S. Poloz]

Just to close on the first question if I may, what I'm suggesting in that line that you quoted to me is that I believe the energy sector in Alberta continues to adjust to the previous decline in oil prices, from the $100 range to the $50 to $60 range. This is showing up in lower wage settlements and downward pressure on commercial real estate as well as residential real estate. Those adjustments, by our models, take three to five years to complete and they're still in train. That's just a reminder that we haven't fully adjusted to all that. I'm not trying to argue that our current conditions don't matter.

As for the U.S.-led trade war, it's giving rise to downgrades in investment intentions in about 47 countries. That's not a coincidence, 47 countries have experienced the same slowdown at exactly the same time in the fourth quarter of 2018. The mechanism that does this is business sentiment, and that too can be verified through surveys of business sentiment. Investment intentions have gone down across a wide swath of countries because of the uncertainty about the future of the global trading system. That is the primary channel that we are monitoring in Canada as an effect.

Going back to trade itself, it's a much more complex question: What direct effects are tariffs having? That is direct effects. Our staff have done all the hard labour around that, and we estimate it's only taken about 0.4 percentage points off of global growth so far. That's the direct effect on trade. Of course, it's distorting trade. It's making some trade categories go up a lot and others go down a lot. It's really not possible to think of that as having that effect on 47 countries, because that's a jumble. The one thing we have in common is weak investment, and I believe it's because of the uncertainty that the trade war raises.

[The Chair, Liberal, Wayne Easter]

Thank you. We're a little over there, and that's fine.

Ms. Rudd.

[Kim Rudd, Liberal, Northumberland—Peterborough South, ON]

Thank you once again for joining us.

I want to ask you to expand a bit. Foreign direct investment rose to $51.3 billion last year, which was a three-year high, the highest annual total since 2015. The inflows of about $16.5 billion in the final three months were the second-highest quarter that has happened since 2015.

The bulk of foreign direct investment last year was in non-energy sectors. As you talked about earlier in terms of the levelling off or stabilization of investment in particularly the oil sector, it appears that there is significant interest in investment outside that sector. Stats Canada stated that Canadian businesses are planning to increase by 2.5% their capital investments in 2019.

Can you talk maybe a little bit about what that means for growing areas of the economy, such as alternative sources of energy and the green economy, as we talk about electric vehicles and as we talk about the opportunities we have in the carbon-reduced economy that Canada is very engaged in?

[Stephen S. Poloz]

The data you give us are correct. Despite a lot of concern about Canada's competitiveness and its ability to attract investment, in 2018 there was about a 5% increase in inbound FDI, which is quite healthy. It's true that this increase was not in the energy sector, but of course, I could say the same thing about domestic investment. Domestic investment was being pared here in Canada in that sector.

The investment we are seeing is in what we would call more growth sectors. That's not to say that the energy sector won't attract investment, because it will and it still is, but it's lower than it was before. Its growth is perhaps constrained by transportation constraints, but slack makes more of an organic growth picture for the oil sector, until there is a pipeline, let's say, in which case we might then see a jump in activity.

In other sectors, I would say that the biggest investment area is intellectual property or softer forms of capital. If we look across, the strongest export sector now, in growth terms, is IT services. The strongest labour market and the strongest employment gains are in IT services. That's just for starters. The IT economy appears to be growing around 7% or 8% per year, attracting a lot of investment. Indeed, much of the investment is not even captured. If you just buy services on the cloud, you don't have to invest.

There are, then, some big transformations happening that make it hard to read, but we think that for investment overall, according to our survey of 100 firms in the BOS, everybody's ready to invest. We're hopeful, then, that the first quarter, when we get those data, shows it.