Finance Committee on June 16th, 2020

[Peter Fragiskatos, Liberal, London North Centre, ON]

I haven't asked it yet. I don't think it's one that compromises your position or the bank's perspective, but I did want to ask you this. How many households would have become insolvent if the Bank of Canada did not take the measures it took to secure and stabilize the Canadian economy and, by extension, protect Canadians? How many households would have been in a difficult position if the Canadian government had not introduced the various programs it introduced? This includes the CERB, the wage subsidy and the Canada emergency business account.

Do you have any thoughts on that, Governor?

[Tiff Macklem]

I don't have the precise numbers that you're asking for. As we start to revise, as we start to come to a base case or a central scenario for the economy going forward, with the economy now stabilized.... In the month of May, we saw some job growth. We are expecting that to pick up.

We are now in a position to start thinking about the path of the economy going forward. As we do that, we can start evaluating the effects of different policies, but it's a bit premature. I don't have those numbers. Senior Deputy Governor Wilkins does have some information, I think, from the—

[Peter Fragiskatos, Liberal, London North Centre, ON]

I appreciate that, but let me put the question another way.

I'm not expecting you, Governor and Deputy Governor, to have numbers on this, but suppose—let's just engage the counterfactual here—the Bank of Canada did nothing. Suppose the federal government did nothing in the face of COVID-19. Is the prospect of a depression possible?

When the Parliamentary Budget Officer testified at the committee just a few weeks ago, he described a situation that very much mirrored a depression situation. When your predecessor testified, Governor, just a few weeks back, it was the same scenario.

[Tiff Macklem]

I don't have precise numbers, but the big risk here, whether it's for Canadians, for businesses or for governments, is the duration of this crisis. The longer it goes on, the more painful it becomes and the problems accumulate. That is why the government has come in very aggressively with very large programs to support businesses and households, to defer tax collections, to provide credit supports through BCAP and other measures. That's why the Bank of Canada is undertaking using tools it has never used before to support the economy.

We can't change the fact that the pandemic has resulted in a very severe recession, the most severe in our lifetime. The best we can do is to do everything we can so that the bounceback is.... Our expectation is that you'll probably see some pretty good numbers in the near term as the economy reopens. That's going to be a bit mechanical and there will probably be a slower period of recuperation thereafter. What we really want to avoid is a non-recovery. That would create huge problems, and that's why these measures are so important.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you very much.

Inflation has come up a few times in this meeting. I believe you know of the work of the Harvard economist Alberto Cavallo, who specializes in inflation and has taken a very nuanced approach to the study of inflation as it relates to COVID-19.

In a recent paper, he wrote the following, and I'd love your thoughts. Of course, he's writing in an American context, but like every other country in the world, Canada is also dealing with the economic impact of COVID-19, so I think his findings are applicable to our situation.

In any case, what he says is that “social-distancing rules and behaviours are making consumers spend relatively more on food and other categories with rising inflation” in these areas—and he points to meat prices in particular as really escalating dramatically in the United States—“and relatively less on transportation and other categories experiencing significant deflation” in these areas. Is this something that can apply to the Canadian context? If it does, to what extent does that worry you?

[Tiff Macklem]

As you point out—and I raised this, actually, in my opening statement—the CPI is a basket of goods that reflects what the representative household buys usually. Obviously, right now we're in a very unusual situation, so we're not buying many of the things that we normally buy. We're not travelling. We're not driving our cars as much. What we are buying is more food. We're at home more. We're buying more home goods and things like that.

Yes, the standard measures of inflation do not capture the reality that most Canadians are facing. We are working with StatsCan to get some measures of inflation that are more representative of what Canadians are really experiencing.

Keep in mind, though, that a lot of these effects will be fairly temporary. The economy is beginning to reopen. Essential stores have been open. Non-essential stores and services are beginning to reopen. People are probably going to go back and start shopping. Their basket will probably get more back to normal, but there may be some long-lasting effects, and it's going to be very important that we understand those.

[Peter Fragiskatos, Liberal, London North Centre, ON]

Thank you.

[The Chair, Liberal, Wayne Easter]

Okay. Thanks, all of you.

Mr. Cumming will be followed by Ms. Koutrakis, who will split her time with Mr. Sorbara.

James.

[James Cumming, Conservative, Edmonton Centre, AB]

Thank you, Chair.

Welcome, Governor, and welcome to your new role, although given the times that we're in right now, you must wonder some days what you got yourself into.

That being said, when your predecessor last appeared at this committee, we had a discussion about the importance of the resource industry pre-COVID and, more important, how important that sector was in the recovery of the economy as we go forward. Do you agree with that?

[Tiff Macklem]

There's no question. The resource sector, the oil and gas sector, is a big part of Canada's economy. As Governor Poloz and Senior Deputy Wilkins have highlighted on a few occasions, the Canadian economy is getting a double whammy. There's the COVID crisis, but we've seen a dramatic drop in both the price of oil and the demand for oil, and that is certainly affecting incomes in Canada, particularly in our oil-producing regions.

We have seen some rebound in the price of oil. On the WCS, the Western Canadian Select, the spread relative to the WTI is actually unusually small, so that's good news. Having said that, oil prices are still well below where they were, and the reality is that global demand for oil is probably going to be lower than normal for some time to come. It's probably going to take a while to work our way out of this, but yes, that is an important element of the Canadian economy.

[James Cumming, Conservative, Edmonton Centre, AB]

When your predecessor was here, the bank had purchased $10 billion in corporate bonds, I believe it was. Can you give us an indication of what that number is now?

[Tiff Macklem]

I'm going to ask Senior Deputy Governor Wilkins to say that. It will be quite a bit bigger. The program was just getting going.

[Carolyn A. Wilkins]

Yes, you're right that the intent is to purchase up to $10 billion in corporate bonds. That program just started, so we haven't purchased the full amount as of yet. There's about $90 million that has been purchased. You will be able to see that on our balance sheet as time goes on. We will be very transparent about the amount of those purchases.

[James Cumming, Conservative, Edmonton Centre, AB]

Along with the corporate bonds and other bond buying, the balance sheet for the bank has pretty much quadrupled.

How sustainable is this? Are you concerned about how long you can keep up this size of purchase?

[Tiff Macklem]

I'm not concerned about the size of the balance sheet. The expansion of the balance sheet is entirely necessary to implement our stabilization of funding markets and monetary policy.

If you look at our balance sheet compared with a number of other central banks, you'll see that it's still relatively small and we have significant capacity.

[James Cumming, Conservative, Edmonton Centre, AB]

How concerned are you about increased liquidity? For the most part, that is involved with the banks doing deferrals, both consumer deferrals on mortgages and corporate deferrals.

Regarding the capacity of the marketplace to be able to repay that deferred debt, are you concerned that, come this fall, we're going to see a fairly steep condition for both businesses and individuals to repay that deferred debt?

[Tiff Macklem]

With respect to debt, this is a risk, and for some time the Bank of Canada has underlined that household debt is high. The government and CMHC have taken a number of actions to try to ensure that the debt levels of more vulnerable Canadians are not going up. We don't want to get Canadians into more debt than they can handle, so a number of what are often called “macroprudential” measures have been taken by OSFI, by the government and by CMHC.

There have also been some provincial initiatives with respect to the housing market. Those are helpful in making sure it's not only the level of the debt; it's who holds the debt. Some people have the capacity. What you want to do is make sure that others don't.

Yes, it would have been better if we'd gone into this crisis with less household debt, but the fact that we've lowered interest rates is making that debt easier to service. The fiscal programs that are replacing the income lost are helping people service their debts, and as I said before, the most important thing to servicing your debt is having a job. We have to support recovery and get people back to work.

[The Chair, Liberal, Wayne Easter]

We will have to end that round there.

We'll go to Ms. Koutrakis, then on to Mr. Lemire, Mr. Julian and Mr. Cooper to start the next round.

Go ahead, Annie. You'll be splitting your time with Mr. Sorbara, I believe.

[Annie Koutrakis, Liberal, Vimy, QC]

Yes, I am. Thank you, Mr. Chair.

Congratulations on becoming the new Governor of the Bank of Canada, and welcome to the finance committee. Hopefully, your tenure will eventually become less demanding than it is at this critical time.

A few weeks ago, I asked your predecessor, Mr. Poloz, if our economy, which is forecast to resume growing again in 2021, following a possible 6% decline in 2020, will recover the growth lost in 2020. He was quite optimistic that we can regain growth and even recoup lost ground relatively quickly, as the economy will be operating under its capacity.

Given what has happened since that time with COVID-19, such as the gradual reopening of our economy, are you as optimistic as your predecessor that we can achieve strong growth? What can the government do to ensure that we recover our lost growth and reach our full potential as quickly as possible?

[Tiff Macklem]

That's a pretty big two-part question. I think I'll focus more on the first part, because I think I've spoken quite a bit about the second part.

With respect to the first part, since Governor Poloz and Deputy Governor Wilkins were last at this committee, we have seen that the economy has stabilized. We probably hit bottom about a month ago. We saw 290,000 new jobs on a national basis across the country in May. I think it's important to stress, though, that different provinces are opening at different speeds, so the experience, depending on where you live in Canada, may be different.

The other thing I would stress is that this crisis is affecting Canadians in different ways. Unfortunately, the crisis is disproportionately affecting the lowest-income workers. You can see in the labour force statistics that women, recent immigrants and youth are particularly affected. Their unemployment rates have gone up the most.

I am optimistic. The good news is that we are starting to see some rebound. The containment restrictions are coming off. I am optimistic that we are going to see.... We expect growth to resume in the third quarter. I think we could see some good numbers, but I would stress that even the good case is still pretty bad. We've seen an unprecedented decline in economic activity, and it's a long way back.

[The Chair, Liberal, Wayne Easter]

Thank you.

Mr. Sorbara.

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

Thank you, Chair.

Thank you to my colleague for splitting her time.

Again, congratulations, Governor, on your appointment.

When the COVID-19 pandemic hit, it knocked off, from what I've understood, about 20% of our Canadian economy. About 20% was taken offline. In economics we use the term “output gap” in terms of measuring. I'd like to get your thoughts, as the economy goes along, on where Canada is in terms of that output gap and how quickly we can close that output gap.

I have a follow-up question afterward.

[Tiff Macklem]

As I indicated previously, right now the staff is updating our economic outlook. The last monetary policy report gave two quite different scenarios, one more optimistic and one quite dire. Now that the economy has stabilized and is starting to reopen, while there is still a lot of uncertainty out there and particularly a lot of uncertainty about the course of the pandemic, that range of uncertainty is narrowing. Our intention is to provide at least a central scenario in the next monetary policy report. At that point, we'll be able to say more about what the size of the output gap is.

I would say, though, that one thing that is very unique about this crisis is that there are important both supply and demand effects. By locking down the economy, we have shut down supply in large parts of the economy. As that supply reopens, our expectation is that demand will not reopen as much as supply, so there will be a sizable output gap. There will be a lot of uncertainty about that, but we will begin to provide some estimates.

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

The famous term “liquidity trap” came from Keynes about deflation. In terms of tying that in with your counterpart in the United States, Federal Reserve Chairman Powell, who gave the famous quote in the last week or so that they were “not even thinking about thinking about raising rates”, would you care to come up with a famous quote this afternoon?

[Tiff Macklem]

I wish I could be so eloquent, but I'm still a very new governor. Give me some time.