Finance Committee on Nov. 23rd, 2022

[Carolyn Rogers]

It is a bit complex.

[Julie Dzerowicz, Liberal, Davenport, ON]

—because I know that there is a lot of concern in the media. I appreciate your mentioning that other G7 countries are also experiencing this. I really appreciate your laying out those options. Thank you.

Governor, you did a wonderful job of articulating where you think inflation is going to be at the end of this year, next year and 2024. Thank you for that. Could you articulate what the risks are, going forward, that could push inflation higher?

[Tiff Macklem]

I'd highlight two sources of risk. Look, there is a lot of uncertainty in the global economy. There is a horrific war in Europe. China continues to deal with COVID, with recurring waves, resulting in new shutdowns. We can't control global events. A number of the important prices in our economy—particularly the price of oil, which feeds directly the price of gasoline and the price of many imported foods—are determined in global markets. We can't control those. There are certainly risks that oil prices could go sharply higher. That would definitely affect gasoline prices and heating prices, and it would definitely affect headline inflation.

Another source of risk is that service prices, as we know, tend to be among the stickiest in the economy. Service price inflation in Canada now is running at about 5%. The good news is that after rising rapidly, it hasn't moved up further. What we're watching for very closely are signs that it's really starting to come down. We've yet to see really convincing evidence that it's starting to come down, but we are hopeful that this will come as we get into the new year.

There is a risk that the inflation in Canada is more embedded, that it is more entrenched and it proves harder to get down than we expect. There are also some possibilities that things could come down faster. We do think that our forecast is reasonably balanced, but as I said in my opening remarks, when inflation is 7%, you're more worried about the upside risks than the downside risks.

Thank you.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Dzerowicz.

Now we'll have questions from the Bloc.

MP Ste-Marie, go ahead, please. You have six minutes.

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

Thank you, Mr. Chair.

Ms. Rogers and Mr. Macklem, thank you for being with us today.

You are not forecasting any real growth for the first three quarters of next year. Is that correct?

[Tiff Macklem]

Growth will be around zero for the fourth quarter of this year, and we expect the same for the first and second quarters of the coming year. It is possible that growth will then be very weakly negative or positive, but we expect it to be positive from the middle of next year.

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

I know that your mandate is to control inflation, which is currently high. Given this objective, to what extent, in your assessment, will the current tight monetary policy contribute to the stagnation of the economy in the three quarters mentioned?

[Tiff Macklem]

Monetary policy is not the only factor, but it is an important one. We have been quick to raise interest rates and we are starting to see the effects of that, especially in the interest rate sensitive sectors of the economy. I am thinking in particular of housing, as well as the large purchases that households often make on credit. The full effect of interest rate rises will take time to be felt across the economy.

Monetary policy is indeed contributing to the economic slowdown, but it is not the only factor. There is also the global economy. We have revised down our forecast for the global economy, especially for the U.S. Our exports to the U.S. are very important.

The reality is that the economy is overheating, so there has to be a period of slowdown. We can reduce inflationary pressures.

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

Are the inflationary surges and the job market the main indicators that make you say that the economy is currently overheating?

[Tiff Macklem]

There are a number of indicators, one of which is the labour market. You are right to mention this. Businesses are struggling to find enough workers to produce all the goods and provide all the services that households want to buy. But that is not the only factor.

Many elements of the economy are overheating. For example, businesses are also experiencing increases in input costs and are having to raise their prices faster than usual, leading to rapidly rising prices for consumers. Indeed, the effects are felt most strongly by consumers. This is an indicator that the economy is overheating. Companies can pass on cost increases to consumers because they are not able to meet all the demand.

These are two important factors, among others, that contribute to an overheating economy.

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

Many economists are wondering about the labour market in the context of the aging population. For every two baby boomers who retire, only one person enters the labour market. Some economists believe that this will lead to a structural change and that traditional labour market indicators will no longer be as valuable, as there will be a dichotomous break.

Do you take into account this possibility of structural change in your analyses? These same economists, and not just those in Canada, are saying that central banks may be too restrictive in their policies, given this new labour market reality.

[Tiff Macklem]

If there's one thing that's easy to forecast, it's the aging of the population: every year, everyone ages by a year. We take this factor into account.

You're right that in Canada, labour force growth is slowing down because of the aging population and the increasing number of retiring baby boomers. Canada is fortunate to have a much higher rate of immigration compared to other G7 countries. This is one of the main reasons why, in our forecast, Canada's GDP growth trend is higher than that of other countries, even the United States.

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

I would like to refer to the study by economist Alexander Lam in relation to the Beveridge curve, which the Bank of Canada published and which you quoted. The study does not attempt to make a concrete prediction of the rise in the unemployment rate, but does predict, in the base case, a 1.5 percentage point rise in the unemployment rate.

For the Bank of Canada, is it a good thing that the unemployment rate is rising, in the current economic climate?

[Tiff Macklem]

It is never a good thing when the unemployment rate rises. But I want to point out that when the unemployment rate is between 4.9% and 5.2%, it is not sustainable. The demand for labour is much higher than the supply, and this is one of the factors that increases inflation. Inflation is not going to go away by itself. We have to take measures to slow down the economy, which means an increase in the unemployment rate. On the other hand, we don't think the unemployment rate will be as high as it has been in past recessions.

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

This will be an increase of around 1.5 percentage points.

[Tiff Macklem]

This is not a forecast, but an analysis of the Beveridge curve, as you mentioned.

That said, historically, increases in the unemployment rate during a recession are normally between three and six percentage points. We think the increase will be below that this time.

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

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Ste‑Marie.

Now we're going to go to the NDP.

We usually go to our standing member, Mr. Blaikie, who does a lot of heavy lifting and, I'll add to that, mediation work here on this committee, but we have the leader of the NDP, MP Singh, with us.

MP Singh, you have six minutes. Go ahead, please.

[Jagmeet Singh, NDP, Burnaby South, BC]

Thank you very much, Mr. Chair.

I thank my honourable colleague for ceding his time to me.

Thank you to the representatives of the Bank of Canada for being here.

I'll start with some opening comments, and then I look forward to your answers to my questions.

We understand and respect that the Bank of Canada is an independent body, and we believe it should remain that way. We understand that you set monetary policy and the federal government sets the fiscal policy.

I want to direct your attention to something you've already acknowledged—that the decisions being made by the Bank of Canada have real impacts on real Canadians. I know you know that, but I want to highlight the real impacts. High interest rates will mean that some families will lose their homes. High interest rates will potentially trigger a recession in Canada, which will mean that workers might lose their jobs.

I'm going to start with some of the comments you made about wages. Since the beginning of the year, I think it's very fair to say, at no point have wages kept up with inflation. In fact, the opposite has happened—wages not keeping up with inflation has meant that most workers, with the cost of living and inflation going up, have experienced a pay cut, and yet, last summer you advised employers not to increase wages.

Do you think it's appropriate to tell employers to keep wages low despite wages not keeping up with inflation and despite how this will keep workers even further behind, when there is no evidence that wage increases are driving inflation? Coupled with that, why have you never mentioned a similar concern with the high profits of corporations, but you have referenced concerns about wages potentially going up, which hasn't been the case?

[Tiff Macklem]

Thank you for the question, because it is an opportunity to clarify what I said.

It's not the Bank of Canada's job to tell businesses what they should pay their workers. It's not the Bank of Canada's job to tell workers what wage they should work for. But it is the Bank of Canada's job to control inflation. What I said last summer, last month and last week to Canadian workers and to Canadian businesses is that Canadians should not expect inflation to stay where it is now. My message was not to plan on inflation staying where it is now, but to plan on inflation coming down. We have taken forceful actions. The forecast I outlined has it coming down to 3% by the end of next year and 2% by the year after.

There are probably going to be new shocks. There will be new curveballs along the way, but our message to Canadians is that we are resolute about getting inflation back to our target.

With respect to the second part of your question, on corporate profits, as I responded to the previous question, when your economy is overheated and you have these inflationary pressures, there are a number of dimensions to that. Part of it is the labour market. As I mentioned, the labour market is very tight. Another—

[Jagmeet Singh, NDP, Burnaby South, BC]

You never mentioned profits.

[Tiff Macklem]

I'm just getting to it. Another element is the behaviour of companies, and I was just talking about that. One of the things we see is that as inflation has gone up and input costs for companies have gone up, they have been changing their prices more rapidly than usual. They've been passing those increased prices very quickly through to consumers, so consumers are bearing the burden of inflation. Companies have been able to keep their margins.

One of the things we're looking for, and we have seen oil prices come down—

[Jagmeet Singh, NDP, Burnaby South, BC]

You still haven't said the word “profit”, though.

[Tiff Macklem]

I'll say the word “profit”. I mean, profits, as you've heard—