Finance Committee on April 16th, 2020

[Sean Fraser, Liberal, Central Nova, NS]

Okay. Thank you.

Governor, I have essentially two questions for you. The first builds upon a comment you made during your remarks. You suggested that it's important to put a floor beneath people, and you indicated that one of the features that may separate the current public health and economic challenges before us from those prior is that this might actually be short-lived, given the nature of the threat that's underlying the economic challenge.

I'm curious to know whether you think the fiscal measures—what you described as being the star in this episode—are going to be sufficient to essentially float the households and small and medium-sized businesses that are facing such a crunch, to help them get through this hopefully relatively short period so that we can bounce back more quickly than we did in both previous recessions and, frankly, more quickly than international comparators.

[Stephen S. Poloz]

Yes, I have quite a lot of confidence in that.

First, when this began, we realized that some of the most vulnerable folks out there would be those working in the rapidly expanding gig economy, all part-time work and that sort of thing. I actually didn't know how big it had become. I knew there were millions, but I didn't realize there were six million individuals not covered by the standard EI system. That's a very vulnerable position to be in, and of course, they're also in the sectors most likely to be impacted right away. The creation of that program to ensure that those folks would have some basic income to get through this period was a very rapid response, which I was impressed to see, and its delivery was very quick.

Second, and particularly attractive, is the fact that the program is what we call “elastic”. If the shock turns out to be twice as big as we first thought, there will be twice as many people drawing that money. If it's half as big, there will be half as many. That elasticity makes it like an automatic stabilizer in the way economists think of it. That's a very positive attribute. You don't have to go back and say, “I need more money, so I have to do something bigger.” It will automatically become bigger if it needs to be.

Third, the wage subsidy is a direct channel. The very desirable feature there is that it maintains the connection between employer and employee. That, I think, would be very important to consumer confidence for that platform you're talking about, in the recovery period. First of all, I know I have a job because I'm going to get called back, but second, the employer's not scrambling around trying to restart and looking for people to fill those positions. That's just another little bit of friction that is avoided by having that kind of system.

I think that does place us really well. That doesn't mean we're that distinct. Other countries did it similarly. Japan did it before we did, and Italy did a similar program. We're learning things. That's what the international conversations are about, I think.

[Sean Fraser, Liberal, Central Nova, NS]

One of the themes I found fascinating during your remarks was the fact that the bank is essentially introducing an inflationary policy to combat the disinflationary consequences that we would see without intervention. I'm curious to know whether you've actually examined this, or have an opinion on what kind of impact we would have seen if we hadn't had such an expeditious fiscal response of this order of magnitude that we're dealing with. I know, at the beginning of this ordeal, there were a number of people on the public health side saying that we needed to be willing to look like we've done too much to avoid the worst consequences. I'm quite happy to look like we've done too much.

Have you done an examination or do you have views on what would have happened in the absence of a fiscal intervention of the nature we've seen?

[Stephen S. Poloz]

That question probably is best saved for two or three months from now, when we actually have some data on how the economy has behaved through this, but we do know the dollar amounts, from the PBO and so on. We have ideas of how much money is actually flowing in. Let's say it is in the order of 5% of GDP. I'm looking at Ms. Wilkins here to sort of nod that it's something like that. If you're putting 5% of GDP worth into the economy, that means the economy would be, give or take, four or five percentage points even weaker than what we'll actually get.

Another way to look at it is, as we've mentioned before, our operations have injected around 10% of Canada's GDP worth of additional liquidity into the system. That's putting quite a scale on that; that is a lot. Imagine if you were to take $200 billion, or 10% of GDP, out of the economy how much disinflationary effect that would have on the economy. What we're doing is offsetting those kinds of forces. It won't necessarily be perfect, but grosso modo we should be in the right ballpark if markets continue to function as they have.

[Sean Fraser, Liberal, Central Nova, NS]

Excellent.

[The Chair, Liberal, Wayne Easter]

Sean, you're a little over your time. Thank you.

[Sean Fraser, Liberal, Central Nova, NS]

Okay. Thank you.

[The Chair, Liberal, Wayne Easter]

Just to tell you where we're at in terms of time, we can give Mr. Ste-Marie and Mr. Julian four minutes each. Then we'll go to Mr. Morantz, followed by Ms. Koutrakis and Elizabeth May, and we might have time for a couple of singles.

Gabriel, we'll turn to you.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

Thank you, Mr. Chair.

Mr. Poloz, you provided an optimistic scenario and a bleaker scenario. You said, “I'm reasonably optimistic. The best-case scenario remains feasible.”

However, as Éric Desrosiers reminded us in this morning's Le Devoir, Statistics Canada spoiled the picture on Wednesday. It released an initial estimate of the decline in gross domestic product in the first quarter. Its estimate was -2.6%, just below your bleak scenario. This was done in particular because of the 9% downturn in the economy in March.

Based on this information, do you believe that the best-case scenario is still feasible?

[Stephen S. Poloz]

That's an excellent question.

Statistics Canada gave that very preliminary figure for the first quarter. The figure is -2.6%. In comparison, our scenario anticipates that the contraction for the first quarter will be between 1% and 3%. This is exactly along the same lines. It's a comparable trajectory.

In terms of the second quarter, the most significant quarter, we can envision a fairly positive scenario of -15% compared to the fourth quarter. The worst-case scenario is about -30%. The reality will probably be somewhere in between. It will depend on when the economy starts to recover. If we start again in May or even in early June, the economy will likely recover in stages. This is a positive or optimistic scenario that would start in the second quarter. However, the third quarter is really a quarter for commitment.

In our view, this positive scenario is a possibility. However, it will depend on the severity of the situation. At what point can we lift the restrictions imposed on the public? We don't know, as the Prime Minister said yesterday. However, I think that this positive scenario would be possible.

The bleak scenario is really bleak in comparison. Bankruptcies and job losses in the longer term, among other things, will affect trust. On the other hand, if trust is maintained, the recovery will be more robust in the third and fourth quarters.

[Gabriel Ste-Marie, Bloc, Joliette, QC]

The trust must be there.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you.

For the clerk or translators, I think both Mr. McLeod and I are still hearing both languages at once. We can pick up the audio, but it is really difficult with both languages coming through in our ears.

In any event, we will turn to Mr. Julian, and then go to Mr. Morantz.

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

Thank you very much, Mr. Chair.

You talked earlier about the provincial bond purchase program that is in place. Of course, many municipalities are struggling now. We've heard mayors in some parts of the country talking about bankruptcy. The large municipalities often fund a big part of the public transit that is so vital between cities, including in the Lower Mainland of British Columbia. We do have the ability in the short term to purchase municipal bonds.

First, to what extent do you see that as a tool that the Bank of Canada could use to support municipalities that are struggling?

Second, in terms of the corporate bond purchase program, are the major banks eligible for that, and can you let the committee know what the criteria will be around the purchase of corporate bonds?

Thank you.

[Stephen S. Poloz]

I'll start and then turn it over to Ms. Wilkins.

Please bear in mind that the purpose of these programs is to help the market function better. It is not to somehow fix the cash needs of a government, whether it's municipal or provincial. The municipal bond market is a relatively small market in Canada, so it's not core to the functioning of markets. Usually those bonds are issued for infrastructure spending.

For immediate cash needs, I think the most likely channel for municipalities is going to be to talk to their province. As you can tell, we now have an ambitious program put in place to help the provincial bond market deal with those short-term digestion effects.

As for the corporate bond market, Carolyn can tell us a bit about how the banks fit in.

[Carolyn A. Wilkins]

The first part of your question was whether deposit-taking institutions are eligible. The answer is, no, they are not for this program. The reason is that we have a number of other programs and have made a number of other changes that have given them the liquidity that is helping them make sure those funds are being channelled to businesses and households.

With respect to the program, it would be senior secured and unsecured debt of highly rated Canadian incorporated institutions. The cut-off for the rating would be BBB. That's just above the lowest level of investment grade. That means there is an eligible universe of just under $100 billion. We would commit to taking up as much as.... There's a cap of $10 billion on that.

There are other belts and suspenders, and the details are going to be worked out, but the eligible maturity would be between one and five years, not the longer-term debt. It's the shorter end of the market but is still a nice centre. It would also mean that we would have to think about concentration ratios, about how much of any particular issue we would be taking up and holding.

Those are the high-level details. When we get the program fully articulated, the full range of details will be made public.

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

When do you expect to have the program in place?

[Carolyn A. Wilkins]

We're aiming for exactly the same timing as the provincial bond programs, so within three or four weeks. That would be to actually start purchases. In all likelihood we would be publishing the full program parameters before that. We hope that this program will ease some of the strains and improve the functioning of what's a very important market for Canadian companies.

[The Chair, Liberal, Wayne Easter]

Thank you all.

We will next go to Mr. Morantz, then to Ms. Koutrakis and then to Elizabeth May.

Ms. Gaudreau, if you want in at the very end if you have a question, just give me a thumbs-up and I'll let you in.

Marty, you're on.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Thank you, Mr. Chair.

Governor, thank you for your time today. It's been a very interesting conversation.

I have a few areas I want to touch on. I did have a chance to review your report, which was issued yesterday. It's quite a sobering read. There are so many things that jump out from it, but one thing that jumped out at me was the part where you talked about the exceptional policy response that the bank and the Government of Canada have engaged in. You list them all, basically: the CERB, the wage subsidy, the bond purchasing and the municipal bond purchasing. You talk about all of those things.

We don't know, because no one is able to say, how protracted this situation is going to be and how long we're going to be in this period of suspended animation. The way I like to think of it—and correct me if I'm wrong—is that it looks like the government and the bank have essentially put the economy on a form of life-support.

How long can we keep this up? How long can the Bank of Canada or the Government of Canada keep us in this state before things start to go wrong, and what kinds of things could go wrong if it goes on for too long?

[Stephen S. Poloz]

I agree that it is sobering. That's for sure. I'm less of a fan of the metaphor of life-support. I think of it as stopping the clock.

As I said before, we stop the clock in as many respects as possible and just let everybody sit back. Then we're going to restart the clock. Of course, we're going to start it up in a few steps, because we can't just do everything overnight.

It's important for us to bear in mind that this is a temporary thing. We can watch what has happened in China, for example, or if you prefer, we can look at South Korea or Italy. Some cases are better than others, like ours, but they all have a cycle that they go through. This is not an open-ended situation.

Our scenario, which we describe as a best case, given where we are today, would have us looking at various places in the economy that could begin to restart sometime in late May, probably, and early June. They're not 100% restored, but.... Maybe lots of us will continue to work the way we are now, doing virtual work and working from home, until the testing is very widespread and the confidence builds that we have things under control. All that is to say, the economy should begin restarting before the third quarter starts and will for sure be doing so in the third quarter.

That means we're going to get a V-shaped trajectory that goes down very sharply and then back up, but not all the way—sort of a half V, like a cursive V—and then the rest of the cursive V curls up at the end. That's when it takes maybe another year for the economy to get back to the same path that it was on before all this started. When we look back at this, we'll say that it was more or less a full year's departure from our previous path. That will happen if we've done a good job of buttressing confidence and having people ready for that recovery period. I think the tools that have been deployed have the best chance of doing exactly that.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

I want to circle back to the issue of inflation. I know you made arguments that essentially all this economic stimulus is really designed to get you back to the market equilibrium that you shoot for in your policy around inflation, which is 2%.

I raised the point in other meetings that just after World War I there was a major recession, a post-World War I recession. Governments in Europe and North America did a lot of these same things, and we wound up—I think the Weimar Republic in Germany was the best example—with massive hyperinflation that caused prices to double every day in multiple powers.

I'm wondering why you're so confident that we're not going to have to deal with that after this horrible situation we're in, and if we do, could you be forced into utilizing interest rates as a tool to get things back under control?

[Stephen S. Poloz]

That would be a nice problem to have, to be frank. As a consensus among economists, our biggest concern here is that, net net, this will be a disinflationary occurrence, that the economy will recover slowly enough that there's persistent downward pressure on inflation. That's why I said it's so important. If we didn't do this, there would be a significant disinflationary force acting on the economy.

If we actually fell into the territory where we had negative inflation for a persistent period of time, this is the part that economists really want to avoid most of all. That's because when you have existing debt and prices are falling, in real terms the debt is rising and your ability to service it is actually falling through time. That is the kind of interaction that gives you prolonged recessions or perhaps even.... That's how the Great Depression unfolded.

Avoiding that means being really aggressive with the kinds of policies that we're talking about today. I was only half-kidding when I said that if inflation pressures did start to emerge, it would be a nice problem to have, because that is the one that we best know how to deal with. You'd be right, but as those conditions evolved, you'd be saying it's time for all this to start going back to normal, and ideally back it would go to normal. Yes, interest rates would rise normally in that situation and cool things off to a point where we have the perfect soft landing. That's the dream scenario.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Then you do think interest rates could rise after all this is behind us.

[Stephen S. Poloz]

Yes. When we get back to normal, interest rates will certainly rise.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

I want to circle back to my home province of Manitoba for a second.

Premier Pallister proposed an idea recently, which I think every premier in Canada liked. It was the idea of the federal government essentially being a central borrowing hub for the provinces—because provinces are borrowing now, too, to deal with the situation—instead of the provinces going into the credit markets on their own and paying more.

My understanding is that you weren't a fan of that idea. I wonder if you could explain why and whether you might have a change of heart on that proposal.