Finance Committee on April 30th, 2019

[The Chair, Liberal, Wayne Easter]

We shall call the meeting to order. Pursuant to Standing Order 108(2), this is a study of the report of the Bank of Canada on monetary policy. As witnesses in the first hour and a half we have Mr. Poloz, who's the governor, and Ms. Wilkins, the senior deputy governor.

Welcome, Governor and Deputy Governor. The floor is yours. We'll start with an opening statement and then go to questions.

[Stephen S. Poloz, Governor, Bank of Canada]

Thank you very much, Chair.

My apologies for a couple of minutes of tardiness. We're not quite used to the new arrangements. This is our first visit to the new building.

[The Chair, Liberal, Wayne Easter]

We get lost too and we've been here for a few weeks.

[Stephen S. Poloz]

Good morning, everyone.

Once again, Senior Deputy Governor Wilkins and I are pleased to be with you to talk about the bank's monetary policy report, which we published last week.

Six months ago, when we last appeared before this committee, we talked about some very positive developments. The Canadian economy had solid momentum and had essentially completed its journey home—that is to say, it was operating very close to its capacity, and inflation was running near our target. At the same time, we were monitoring the risks posed by protectionist trade measures and elevated levels of household debt.

Unfortunately, since then, there have been a couple of negative developments. These have caused a detour for the economy and are delaying its return home. Our forecast is based on the belief that the impact of these developments will be temporary, and that once the associated adjustments take place, stronger economic growth will resume. So, in the monetary policy report, we marked down our forecast for economic growth this year to 1.2%, and we project growth of near 2% for both 2020 and 2021.

Let me offer a few details. First, the global economy slowed toward the end of last year. To be clear, some slowing was expected as the stimulative impact of U.S. fiscal measures fades, but the slowdown was deeper than most forecasters projected and has persisted into 2019.

A major factor behind this global slowdown has been the U.S.-led trade war. This is delaying business investment decisions in many countries around the world. Uncertainty about future trade policies has risen. Here in Canada, doubts about the ratification of CUSMA have increased, and these remain a downside risk to our outlook for investment.

lt is certain that an escalation of trade conflicts would be a blow to the global economy; however, the global economy could receive a significant lift if there were progress in resolving these conflicts.

I should emphasize that businesses and economies will ultimately adjust to the heightened level of uncertainty around trade by adjusting their investment plans lower. Once those adjustments are complete, however, economic growth can pick up again.

The other major development since October was another sharp decline in oil prices late in 2018, which put Canada's oil sector under considerable stress. More recently, oil prices have firmed, including the prices our western producers receive, but transportation constraints on future growth remain a significant source of drag and uncertainty. This has led to another downward revision to investment intentions in the sector.

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 $50 to $60 per barrel, rather than the much higher prices of five years ago. This adjustment process is also being reflected in wages and other costs and in developments in the housing market in Alberta.

lt's important to note that as investments in the oil patch are pared back, Canada's growth slows, but when those investment levels stop falling, Canada's growth will pick up again, even if oil sector investment does not, because other areas of growth will come to dominate the data. We saw exactly the same dynamic following the oil price shock of 2014-15.

ln addition to concerns about global trade and oil prices, we've continued to watch how the Canadian housing market is adjusting to a combination of factors: provincial and municipal housing policy measures, the revised guidelines for mortgage lending and past increases in interest rates. The adjustment of the housing market is particularly important given the context of elevated levels of household debt.

Our analysis has been complicated by activity in some previously frothy markets—the greater Toronto and Vancouver areas, in particular. Research by bank staff shows that the sharp rise in housing resales above fundamental levels in Ontario and British Columbia and then the subsequent fall correlate strongly with house price expectations. This suggests that provincial and municipal housing policy measures have had a much stronger impact on housing activity than changes to mortgage lending guidelines and past increases in interest rates.

Supporting this analysis is the fact that many other markets across the country are seeing solid activity even though they have the same mortgage lending guidelines and interest rates. This is what would be expected in an economy that is growing, with a rising population and strong labour market.

The implication is that as the situation in Toronto and Vancouver stabilizes, the Canadian housing sector should return to growth overall later this year.

Finally, I would note that the federal government and several provinces have made fiscal announcements during budget season. Our analysis suggests that the combined impact of adjusted spending plans announced to date would lead to a downward revision for our growth outlook of about 0.2 percentage points in 2020.

In sum, the Canadian economy is currently facing some headwinds, but there's good reason to believe the economy will accelerate in the second half of this year. In this context, the bank's governing council judges that an accommodative policy interest rate continues to be warranted.

We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive. In particular, we are monitoring developments in household spending, oil markets and global trade policy to gauge the extent to which the factors weighing on growth and inflation outlook are dissipating

In case you have not heard, I should mention that since we last met, we launched the new $10 banknote featuring Viola Desmond and the Canadian Museum for Human Rights in Winnipeg. It has been named the best new banknote in the world for 2018.

With that, Senior Deputy Governor Wilkins and I will be happy to take your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Governor. We always appreciate when you come before the committee and the work that both you and the senior deputy governor, as well as the Bank of Canada, do.

We'll start seven-minute rounds with Mr. Sorbara.

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

Thank you, Mr. Chair.

Welcome, Senior Deputy Governor and Governor.

In the last three months we've had a series of data reports come out. We had the business outlook survey, the monetary policy report, this morning the February GDP, and in the last couple of weeks, the international trade report. One measure that we brought in, in the fall economic statement, and it's in the budget implementation act, is the accelerated capital cost allowance, which has been referred to in both the business outlook survey and the monetary policy report, and it seems to me that firms are responding to that measure.

Would you care to comment with regard to the immediate expensing and what that should do to firms' investment intentions?

[Stephen S. Poloz]

At this time, it's still difficult to say. Certainly you're right that in the surveys, our own survey in particular, companies are mentioning that. They were mentioning that as a possibility back in our previous survey.

It comes in the context in which expectations for future investment were actually pretty strong. However, as we've noted, companies have been holding back their investments because of uncertainty around the future of NAFTA. That uncertainty was lifted for a time late last year once the CUSMA was signed, but it seems to have re-emerged in light of the difficulties around ratification.

That's important context. All other things equal, I would expect to see a response to this tax change, but we haven't any data on investment yet for 2019. Our first data will be in about four weeks' time. At the end of May, we'll get the first quarter data on actual investment spending. Before that time, I would have to wait and see what the data would say.

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

Secondly, this deals with fiscal policy more than monetary policy, but StatsCan reported at the end of February on the poverty levels in Canada and how they have declined. They have declined considerably since we've come into government, in part owing to, I would say, the Canada child benefit, the impacts of which the Bank of Canada has measured in terms of households and household spending.

With a decline in poverty across Canada, over 800,000 Canadians have been lifted out of poverty. How powerful an instrument does the bank feel the Canada child benefit has been for Canadian household spending?

[Stephen S. Poloz]

I would just say that when we were analyzing the macro economy back when it was introduced, it made a significant difference to the level of the macro economy.

As for comments related to poverty and the distribution of income, I'll turn to Ms. Wilkins.

[Carolyn A. Wilkins, Senior Deputy Governor, Bank of Canada]

Clearly, the Bank of Canada doesn't have any control over the distribution of income. We deal with the inflation rate, but at the same time, the distributional aspects of the economy—the distribution of income, wealth and debt—can actually have a big impact on how the economy performs. For this reason, we pay close attention to labour income growth, which is a big part of people's well-being. We see that wages are growing across the country. They are growing less in areas that are affected by oil, actually quite a bit less. That's to be expected. Wage growth overall is a little over 2%. It's still a bit shy of where we would expect wage growth to be relative to productivity and inflation, but certainly we expect that to pick up.

Getting back to the distributional implications, one of the things you can look at is labour income's share in GDP. What's the share of the pie that labour is actually getting? I just happened to look at those numbers and could see that over the last...well, since 2005—so you kind of go and predate the crisis—labour's shared income has actually increased. It's nudged up a bit. It's certainly down from where it was in the eighties, but it has edged up.

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

Thank you.

One of the things in the monetary policy report that came out to me were the cuts that have been introduced by the provincial government in Ontario in terms of the fiscal impact on the economy. You've modelled it and it has come out to be—not directly—0.2% to 2020 growth. I want to put on the record that a provincial Conservative government in Ontario and its fiscal policies will negatively impact the Canadian economy in 2020.

Do you have any comments, Governor?

[Stephen S. Poloz]

I have no comments beyond the ones I think you've offered. For us, it's basically mechanics. It's not a judgment about how policies will perform or how the mix of policy may have changed things. For us, it's just a matter of taking the spending lines that are laid out in a budget and comparing them to the spending lines that were in the previous budget. In 2020, there is this difference and it subtracts relative to where our forecast was. It doesn't drag the economy per se, but it reduces where our forecast goes.

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

Thank you for that comment. We've seen, obviously, that teachers are being made surplus in many ridings across the province of Ontario, that there have been layoffs and that everything from a $4.7 million tree-planting program to inspections and so forth is being cut. The details have come out. Public health funding in the City of Toronto is being cut. It's sad to see that the province is adopting that measure. That's my personal opinion.

Going back to monetary policy, you have revised down the neutral rate by 25 basis points, and we're at 1.75, so—we can do the math—it would require two more rate increases to get to the lower bound of the neutral rate. A changing global growth has impacted us, but Brent prices today are up at $73. I don't know where the discount is, but I'm sure WCS is coming up a bit as well. Is the neutral rate revised down because of transitory factors or was it revised down, in your humble opinion, because of permanent factors?

[Stephen S. Poloz]

I would say that the revision down is primarily structural. I wouldn't quite use the word “permanent”, but that revision reflects four separate methodologies that look at it through different lenses.

The main thing that's going on there is that the global neutral rate appears to have drifted lower and has done so for the last couple of years. That happens in the context of important drivers such as a slowing labour force growth, because those of us who were baby boomers are gradually retiring. That big bulge in labour force participation is a 50-year period during which we had much stronger growth in the labour force globally, not just here. That's coming down to what you might consider to be historically more normal, if you think of the 50 years as abnormal. That is the primary driver and that's just.... Again, it's close to mechanics. It's not a very sophisticated analysis. It's just that you can't have much.... The economic growth trend line for the world is driven by that labour force and by productivity. Only if we did have a long-lasting rise in productivity would there be pressure for it to rise, which is why I wouldn't say “permanent”—because that, of course, is quite possible.

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

Of course.

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you all.

Mr. Kmiec, you have around seven minutes.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Thank you, Mr. Chair.

Governor, on November 23, 2018, on a Friday, the Bank of Canada put out a notice entitled “Expansion of Assets the Bank of Canada will Acquire for Balance Sheet Management Purposes”. Specifically, it was informing the markets that you would start buying Canada mortgage bonds. Why did you take that step?

[The Chair, Liberal, Wayne Easter]

Just to interrupt for a sec, the bells are ringing. I'm assuming we have unanimous consent to continue until about seven minutes to or so. Is that okay?

[Some hon. members]

Agreed.

[The Chair, Liberal, Wayne Easter]

All right.

Sorry, Governor, there's a vote in 30 minutes, but we'll go until about seven or five minutes before we have to vote.

Go ahead.

[Carolyn A. Wilkins]

Yes, that was a decision that was entirely related to how best to manage our balance sheet in a way that doesn't impede the performance of a major core funding market, which is the Government of Canada market.

Because of the size of the debt outstanding—that's either treasury bills or government bonds that are issued—and the needs of our balance sheet, we were taking up more and more of the bonds in the primary market. Because of that, we were not leaving enough for the private sector, which actually needs those bonds, so in our balance sheet management, we look at what other obligations that don't put the Bank of Canada's balance sheet at risk are suitable for balance sheet purposes. That was one asset that we considered a while ago and decided to start purchasing. It has nothing to do with anything other than that, including the state of the housing market.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

It says here that it's on the primary market on a non-competitive basis, but it sounds like you're actually going out and buying Canada mortgage bonds. According to your balance sheet, as of March 31, 2019, you have about half a billion of them under investments. Are you competing with the private sector on the market, then, to buy these bonds, or are these bonds that others don't want to buy?

[Carolyn A. Wilkins]

Others would want to buy them, but we buy them in the same context that they do. I can get back to you on the exact format of the purchasing arrangement.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Please, yes. That would be very helpful.

[Carolyn A. Wilkins]

I can do that.