Finance Committee on April 12th, 2017

[Stephen S. Poloz]

These things pretty well go together. At the root of this is that during the strong dollar period, followed by the global financial crisis and the global recession, we lost some 8,000 to 10,000 exporting companies that went out of business.

When the conditions for recovery were in place, with the U.S. economy getting stronger and the Canadian dollar easing back, that combination would normally have produced a much stronger export recovery. In fact, what happened was that many of those companies were no longer there, so they didn't respond to that stimulus in the way our models would have predicted.

We have been busy during this period, remodelling the sector at a more micro level. There is plenty in there to encourage us. There are sectors that are emergent and are growing faster, so that's a good thing, and there are others, of course, that are not.

Together with that is the investment side. What we were expecting was that exports would grow to a point where companies were fully using their resources and then would expand through new investment. That natural sequence has not really gotten under way, for the reasons I've just said.

If I may say so, one last thing is the cloud of uncertainty coming from south of the border, which is causing companies to hold back on those investments.

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

Of course.

Just changing tangents to the regional housing market, and I say “regional” for a purpose, the GTA in my understanding is probably growing at a 4% to 5% clip a year. You commented recently about some of the fundamentals supporting the housing market, but with the caveat that you see levels of speculation.

Many of us hear from our constituents all the time about the affordability or unaffordability, but mostly the unaffordability, of housing in the GTA. You've also commented, Governor, and please correct me if I'm wrong, about some supply issues.

If we were going to rank the reasons for the rate of price increases we're seeing, what would your comment be on those? Can you add some colour there, please?

[Stephen S. Poloz]

If we begin at the most basic, a price change is always a question of demand or supply, or both. Demand, as you say, has been growing in the GTA, but the economy has been growing at 4% to 5%. It's being fuelled by immigration and job creation. That creates a very basic demand for more housing. Supply has been growing but has not kept up with that demand, and so there's a natural tendency for prices to rise. Those are fundamentals.

However, there's no fundamental story that I could tell that could justify price rises of 20% or 30%, so without being specific about just how much of it is due to speculation, it's obvious to me that a growing amount is due to speculative behaviour, which means people buying housing not to live in but to flip, etc., for investment purposes.

That of course is a more risky phase of any cycle. It means that it's time to remind people that house prices can go down as well as up and that they should be doing their own risk assessments, fundamentally asking, for example, “Why am I buying this house”, and “Could I withstand a 10% correction in prices?” Many ordinary people could; they would just continue to pay their mortgage and live there. The speculators, however, would not be able to do that, and so it's financially risky.

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

Mr. Chair, do I have time for one more?

[The Chair, Liberal, Wayne Easter]

No. We might get back to you later.

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

Okay. Thank you.

[The Chair, Liberal, Wayne Easter]

Mr. Albas.

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

Thank you, Mr. Chair.

Thank you to our guests for being here, and for the work you do for Canadians every day.

We're obviously in a period of divergent policy, in which the U.S.... I take the point of the senior deputy governor that while the Bank of Canada is an independent institution, many people would cite the equally true fact that we're in an interdependent and integrated economy with the Americans. We're holding steady, with interests rates at least. I'm not going to ask you to comment on where they might go, but what does it mean in practical terms for our dollar, etc., if the American rates are going up? What has your modelling shown?

[Stephen S. Poloz]

It's true that the Canadian-U.S. economies are highly integrated, and we're to a lesser degree integrated with lots of economies, but the one kind of disturbance that breaks that integration is the one we came through, which is the oil price shock. The decline in oil prices is fundamentally good for the U.S. economy, because it's a net importer of oil, and fundamentally negative for the Canadian economy, because we're a major net oil exporter.

That difference caused a divergence between the two economies, and it's the reason that our progress in reducing our unemployment rate stopped at the time of the oil price shock. In the U.S., progress in reducing theirs actually picked up speed, and so their economy has reached full employment far before we have. This is a divergence in levels or of point in the cycle, and not necessarily of growth rates.

In that context, it's very important that we be clear that we are conducting independent monetary policy. We can't just follow the U.S., because if we did, we would for sure undershoot our inflation target, because we would have excess capacity. That is one of the reasons we have a flexible exchange rate: to give us that policy independence. If we had a fixed exchange rate, we wouldn't have any.

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

On the point that we have a floating currency—and of course, you've said that your earlier models may not have told the complete story—with a lower dollar you would think there would be higher exports, and they have not happened. I think that's partly due to the permanent loss of production capacity.

With respect to that—for example, in agri-growth, the chair talks about agrifood as being a leading process—a farmer can choose to plant another acre or not; very firm decisions can happen. For someone to expand or build a new plant, there are many more processes that go into it.

Does the Bank of Canada expect that Canadian exporters will reinvest in production capacity as a result of the low Canadian-U.S. exchange rate, and what other federal measures could help them to increase their production capacity?

[Stephen S. Poloz]

There are many sectors that are responding, as the textbook would suggest, to the lower dollar. It was primarily in the manufacturing sector where we lost those 8,000 to 10,000 firms, and so we are getting classic responses across the economy. An example is the food business, which is very strong. Another one is IT services, which is a very big, growing business, or tourism, and furniture. There are classic examples.

We're confident that process is working as it normally does. It's just proving to be slower than in the past, and it will rely on the creation of new businesses as we go through time to fill in the room that's been left behind by a smaller energy sector.

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

Thank you.

We were talking about household indebtedness. Often people associate mortgage debt with household debt. Household debt is obviously a more expansive term that could include mortgage debt. Is there risk in the non-mortgage sector? The government has already taken very draconian efforts in that respect. Do you see that there are other actions that are necessary or would be helpful to limit risk when we're talking about overall household indebtedness?

[Stephen S. Poloz]

I'm afraid I don't have the statistics in front of me, but the vast majority of household indebtedness is because of mortgages, not consumer debt. There is, of course, automobile debt and other debt. So that exists. I don't want to dismiss it. In some respect, there are some warning signs, such as lengthening terms on car loans, for example, and people going into negative equity on their car loans, and that sort of thing. There are some issues there that are symptomatic of risk, but the lion's share of our concern is related to the housing market. Either way, we generally think of household debt as one thing because it is actually quite commingled, and it is high.

I want to make one last comment before the chair stops me, which is that, as the stock of debt as a share of our economy rises, it's usually not because of individuals becoming more indebted. It is usually because of individuals with no debt becoming indebted for the first time, in buying their first home in particular. Given the new requirements that have been put in place, we know the stock of debt is becoming more sustainable as time goes on because of those new rules.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Fergus.

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

Thank you.

Governor Poloz, Senior Deputy Governor Wilkins, thank you for joining us. The quality of your French is extraordinary. I would also like to recognize the collective work you have done to make sure that the Canadian economy is functioning well.

I feel that all my colleagues around the table will agree that, when the economy is going well, it has very positive effects on our immediate political situation. Of course, that is not a concern for you.

In the “Monetary Policy Report—April 2017”, published today, you say that the economy performed better at the end of 2016 and the beginning of 2017 which could partially be attributed to the Canada Child Benefit.

In whichever language you choose, can you give us a brief overview of the effect the program has had on the Canadian economy and tell us why you forecast that the effect will not continue through the coming months?

[Carolyn Wilkins]

Sure.

The real effect of the program was to increase parents' disposable income. That means that parents must then decide whether they want to spend the money, save it, or use it to pay down their debts. We projected that parents would choose to spend a little and save a little, and that is exactly what we observed.

However, we were surprised to see the effect was much more concentrated in time than we would have thought. This kind of change increases income levels once, but it continues to another level. The effect on the level of consumption is permanent, but, unless the amount continues to increase, the effect on growth disappears. That is the basic arithmetic of growth.

In a nutshell, a one-time increase in income level is very positive, but it cannot continue if the amount of the increase remains the same.

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

Can we measure how much of an effect the Canada child benefit has in that one time? It just puts us—

[Carolyn Wilkins]

An estimate was made, but I must confess that I don't have the figure at hand. Mr. Poloz, do you recall the figure?

[Stephen S. Poloz]

They spent about 50%.

[Carolyn Wilkins]

They spent about 50%.

[Stephen S. Poloz]

On average.

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

That comes back to the question you asked about the level of Canadian household debt, which is quite a serious problem. It's good that you are trying to find the right balance and to keep a key interest rate that encourages economic growth within a certain range. Since that was established in the the 1990s, you have been doing a good job and are continuing along the same lines.

The key interest rate is at a historic low. How can we adjust that key rate to ensure that Canadian households do not incur more debt? At the same time, we do not want to put the brakes on economic growth. We know very well that the indebtedness is because people are spending, which in turn stimulates economic activity.

[Stephen S. Poloz]

That is a very complex question.

Frankly, the key interest rate is only one instrument. Your question involves a number of objectives.

Our first objective is to maintain a stable inflation rate. If the inflation rate remains at 2%, the rest of the economy is in balance. We have achieved the best of everything while keeping the inflation rate stable. The inflation rate influences everything else.

Indebtedness is something else. The indebtedness has accumulated over a long period of time. Our way of resolving it is to keep the economy in balance. It will then take time for everything else to adjust.

[The Chair, Liberal, Wayne Easter]

Mr. Liepert.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Thank you, Governor.

I want to follow up a little bit on my colleague's questions about the dollar.

I recognize that there are many things you put into the hopper, and they stir around and come out the other end, but for the economy to continue to grow, what in your view is an appropriate level for the dollar? Is it 75¢, as it is today, and as it seems to have hung around for the last couple of years?