Including government borrowing—
Evidence of meeting #112 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was spending.
A video is available from Parliament.
Evidence of meeting #112 for Finance in the 44th Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was spending.
A video is available from Parliament.
4:15 p.m.
Liberal
4:15 p.m.
Liberal
Joanne Thompson Liberal St. John's East, NL
Thank you, Mr. Chair.
Thank you both for coming.
It's a wonderful opportunity to be able to break through so many of the narratives that we hear and to have your perspective on inflation and many of the things that government can do and is doing to help move forward.
I want to reference something that MP Blaikie spoke about, which is the link to supply and inflation, specifically around programs like the $10-a-day child care, which really helped move people into the workforce—women in particular—and also the work that government is doing to address the climate crisis.
Is that helping to move us to the levels of inflation that we want to see? Is it part of the supply portion of the supply-and-demand equation?
4:15 p.m.
Senior Deputy Governor, Bank of Canada
Those are two very different things you raised there, so maybe I'll deal with them separately.
The day care programs did help to significantly increase the proportion of women, and young women, in the workforce at a time when we had a really tight labour market. I would characterize that as something—to the governor's earlier description—that added to supply. In a very tight labour market, it did help the supply of labour.
The measures to address climate risk are a good example of something with a very long lag, as the governor described earlier. The effects of climate risk are more indirect.
You can have an extreme climate event. For example, with the forest fires we experienced this summer, our estimate is that they took about a half a point off of GDP for the second quarter. Longer-term programs that mitigate those risks will hopefully, over time, to the degree that they can, reduce the number of extreme climate events. That would be helpful.
That is a very good example of something with a very long lag and something that might, in the near term, add to demand more than it would add to supply.
4:15 p.m.
Liberal
Joanne Thompson Liberal St. John's East, NL
Thank you.
To either one of you, could you speak to the resilience of the Canadian labour force and why you wouldn't qualify this period as a period of stagflation?
4:15 p.m.
Governor, Bank of Canada
Well, stagflation is a very provocative word.
I grew up in the 1970s, and the big problem was stagflation. What that looked like was double-digit inflation and double-digit unemployment.
Inflation is still too high. At 3% or 4%, inflation is too high.
I know you're all hearing from your constituents. They're having trouble keeping up. Affordability is a real issue, and we need to get inflation down. Prices are going up too quickly. However, it's not double-digit inflation. It's not even 8% inflation. We've brought it down considerably since then.
The unemployment rate remains pretty low by historical standards. It has gone up a bit, from about 5% to about 5.5%, but by historical standards, it's pretty low.
What we're seeing now is not what I would call stagflation. It is true that in our outlook that we put out last week, we did revise up our near-term outlook for inflation and we did revise down our near-term outlook for growth. That is an indication that this is proving to be a little more difficult than we had hoped, but I would stress that it is working. As higher interest rates feed through the economy, we do expect inflation to come back down and growth to resume, and Canadians won't have to live with the ongoing anxiety of inflation.
4:15 p.m.
Liberal
Joanne Thompson Liberal St. John's East, NL
If I could just jump in, the extenuating circumstances—the price of oil, the geopolitical realities and the tragedy we're seeing in the Middle East—are impacting inflation as well. We set the targets, but we have these other extenuating circumstances that are impacting the work within government in terms of budget and policy.
4:20 p.m.
Governor, Bank of Canada
Yes. You know, Canada has a very open economy. We're a trading nation. We export. A lot of our income comes from selling things to other countries. We import a lot of goods as well. When you operate in the world, global factors will impinge on your economy.
Yes, when global oil prices go up, we see higher prices at the pump. Canadians are seeing that. We're also an oil exporter, so our energy companies are getting more revenue when oil prices go up. You have to factor in all these effects.
4:20 p.m.
Liberal
4:20 p.m.
Bloc
Gabriel Ste-Marie Bloc Joliette, QC
Thank you, Mr. Chair.
Governor, I want to tell you about an analysis recently conducted by an economist, Mohamed A. El‑Erian, of the global economy and the American economy in particular. I would like to hear your comments on the Canadian economy more specifically.
Mr. El‑Erian writes that there's a consensus among economists, or at least a prevailing view, that we're headed for a soft landing. In his opinion, however, there's still a a risk that it will turn into a crash landing in the next few weeks. The main and immediate risk, he says, is the recent spike in global borrowing costs, which in turn results from decisions by the U.S. Federal Reserve and other central banks, such as the Bank of Canada, to maintain elevated rates for an extended period of time in order to counter inflation.
Would you care to comment on that analysis?
4:20 p.m.
Governor, Bank of Canada
Since we began raising interest rates, many economists have told us we would cause a recession, but what we have now isn't a recession. We're going through a period of low growth, of course, but that's necessary in order to relieve inflationary pressures.
As you said, long-term interest rates have risen sharply in recent months, especially in the United States. As the deputy governor just mentioned, the situation can be explained as the result of a number of factors. However, it's hard to say right now exactly which ones are most significant.
In the forecasts we released last week, we included a rise in long-term interest rates. So that's included in our forecasts. There's a risk that these increases may be significant. If that occurs, and especially if it reflects increases in the yield curve, that would further reduce the growth rate of the global economy. We would of course be affected here in Canada because we have a very open economy.
So that's a risk that we have to monitor closely.
4:20 p.m.
NDP
Daniel Blaikie NDP Elmwood—Transcona, MB
Thank you.
As part of our pre-budget consultations, we've been hearing from a number of economists with different points of view. One thing we heard recently was that over the last couple of years, corporate profits were up in absolute terms, but they were also up significantly as a share of GDP.
Is that consistent with the Bank of Canada's analysis?
4:20 p.m.
Senior Deputy Governor, Bank of Canada
I don't have at the tip of my fingers any analysis on profits as a percentage of GDP, but we have done some work on this. In fact, one of our colleagues, Deputy Governor Nicolas Vincent, recently gave a speech on the topic of corporate profits.
In an environment where demand is running ahead of supply, it becomes easier for businesses to raise prices. People get discouraged with inflation. They stop shopping around. In that environment, if there is excess demand and people are less inclined to shop around, it's easier for businesses to raise prices. That is exactly what business has been telling us they're doing. In our business outlook survey, they've been telling us that they are raising their prices more often, and by more than they have in the past. That has tapered off a bit recently. Businesses are telling us now that as the economy gets back into balance and demand and supply are running closer, they have reduced both the rate and the amount at which they are increasing prices.
We have a ways to go yet. They are still above where they were prepandemic. That is something we'll be watching. In our press releases and many of the governor's comments, we always tell you the things we're looking at to know when core inflation is back where we need it to be to get headline inflation down. Corporate pricing behaviour is one of the things we're watching closely.
4:25 p.m.
NDP
Daniel Blaikie NDP Elmwood—Transcona, MB
What I'll say to that is that, for your ordinary Canadian, one of the things that really make you feel like the system is stacked against you is that you get gouged by corporations in a difficult economic time. They raise their prices, which causes the inflation rate to rise, and then the answer is to raise interest rates. The people who were getting squeezed by outsized corporate profits before end up getting squeezed on their mortgages and on other products that they use financing to obtain.
It's kind of a double whammy for the Canadians who are caught in the middle of these forces that are a lot larger than they are. Getting gouged by corporations on the one hand and then having the monetary policy remedy be higher interest rates gets the Canadians again. The corporations that have these large holdings can actually earn more on those holdings by doing less, just by sitting on the money or purchasing bonds or whatever else, because interest rates are higher. It does seem like a system that's designed to help the rich get richer and have everybody else pay for it.
4:25 p.m.
Liberal
The Chair Liberal Peter Fonseca
Thank you.
There's no time for an answer to that. It might be in the next round.
4:25 p.m.
Liberal
4:25 p.m.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Thank you, Mr. Chair.
Governor, I had occasion to look at the housing affordability index that your bank publishes. It was interesting. In 2015, at the tail end of Mr. Harper's administration, the index was at 32%. Today, under this Liberal administration, it's at 51%. It certainly highlights the problem, which is that we are in a housing crisis.
One thing that you said last week that I thought was interesting—and it might have been Deputy Governor Rogers who was talking about it—is that there is normally and historically a correlation between interest rates and housing prices. For example, if interest rates go up, housing prices come down somewhat; if interest rates come down, housing prices go up somewhat.
You said something interesting that I want to get clarification on. You said that the reason housing prices are not declining as expected is because of the structural shortage of housing supply.
I'm wondering if you could comment specifically on what you meant by that. Be brief, if you could, because my time is limited.