Finance Committee on March 23rd, 2023

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

Thank you.

As a senior economist with BMO, do you advise the senior leadership team and the board of directors on economic issues? Do you advise them and give them your thoughts on ways in which the financial institution might want to look at risk mitigation and help with the direction as to the decisions of BMO?

[Michael Gregory]

I personally do not do that. It's possible that the chief economist, Mr. Douglas Porter, may in fact be involved in more of those, but we provide information through the reports that we publish, which are available publicly. I meet regularly with various people throughout our institution, as well as our clients, to give them our opinions and our insights and hopefully have them all make better decisions.

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

Okay.

Are you concerned that defaults will go up?

[Michael Gregory]

I'm always concerned when the economy looks like it may be headed to a downturn. You know, there is always some fallout from that. There always is when there's a downturn. The good news is that the downturn is going to be mild by historical standards.

To put that in a bit of context, we officially are looking for negative growth in the second and third quarters of this year, but a peak to trough of just about two- to three-tenths in terms of net decline in GDP. While that may barely satisfy the technical definition of a recession, it is not going to generate the kind of strain on creditworthiness that more typical downturns tend to generate.

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

Okay. Thank you.

When you said the word “fallout”, does that mean people losing their homes? Is that what you meant by fallout? Do you believe that more people will be vulnerable to losing their homes?

[Michael Gregory]

No. By fallout, I mean implications for credit deterioration and creditworthiness—the whole gambit of all the borrowers in the Canadian economy, both consumers and businesses.

[Tracy Gray, Conservative, Kelowna—Lake Country, BC]

Does that include foreclosures as well?

You're talking about people's credit history being potentially harmed. You're not saying that you're expecting insolvencies to go up. Is that what you're saying, that it would be more just affecting their credit history?

[Michael Gregory]

What I'm saying is that we are going to have a kind of weakness in the economy that should have a minimal impact, because it's not going to be a typical recession; it's going to be a very mild one. There's a tremendous amount of support for households in terms of $350 billion of accumulated excess savings. U.S. consumers have started to tap that, but Canadian consumers have not. We are of a more conservative bent, I suspect, and that has us stashing it away, potentially for a rainy day, so I think the—

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Gregory, and thank you, MP Gray.

Now we'll move to the Liberals for five minutes.

MP Chatel, go ahead, please.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much, Mr. Chair.

I'll start by thanking all the witnesses for being here with us.

Mr. Jean, you mentioned the United States' Inflation Reduction Act earlier. I appreciated your comments on the opportunity Canada now has to invest in the transition to a clean economy. I believe that this economic change in direction is something we need to buy into, given the importance of our trade with the United States. It's a wonderful opportunity for Canadian businesses.

You really piqued my curiosity when you said that we couldn't imitate the United States and that we should instead recognize and rely on Canada's strengths. In connection with this, you mentioned critical minerals and our skilled labour force, which is one of the best educated of all the G20 countries.

Could you tell us more about this, Mr. Jean?

[Jimmy Jean]

Of course.

In terms of the energy transition, we have advantages in energy production. Quebec's hydroelectricity is one such example, and its costs are relatively low. This gives us a natural advantage and makes us a credible player in terms of clean energy. However, we mustn't rest on our laurels, because the rapid drop in the cost of solar and wind energy will make it increasingly difficult for the hydroelectricity sector to remain competitive. We need to dramatically increase our production of clean energy—wind and solar energy in particular—not only in Quebec, but across Canada. That's just one example.

There is also a supply chain for solar and wind energy production equipment to be used in the energy transition and the development of the electricity network.

Similarly, the United States is historically much more productive, and capable of generating productivity gains and economies of scale, even without government assistance. Added to that is serious government assistance in the form of tax credits. It would be very difficult for Canada to compete unless the government responds, and unless we target sectors where we have comparative advantages.

One such advantage is in battery recycling. Demand for electric vehicle batteries will largely exceed production capacity. That will create a huge demand for recycled batteries, which could become an advantage for Canada if it positions itself as a hub in this area. This would perhaps be an intelligent way of responding to the challenges of the Inflation Reduction Act and also a means of entering into the North American value chains that will be generated.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much.

I think that our government's recent announcement of the major investments from Volkswagen here in Canada, and in Bécancour for EV batteries, are an indication that we're on the right track.

Mr. Jean, you were speaking earlier about a possible recession. That, of course, worries many Canadians. But if we introduce the right policies, Canada will be on track to become a leader in tomorrow's economy.

Can you talk to us about your economic predictions beyond 2023? Are we going to get through this?

We were talking about resilience earlier.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Chatel.

We have come to the end of our time.

[Jimmy Jean]

May I answer the question?

[The Chair, Liberal, Peter Fonseca]

I know it goes very quickly, so maybe the next chance....

We're moving over to the Bloc and Monsieur Savard-Tremblay, please, for two and a half minutes.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you, Mr. Chair.

Mr. Jean, in connection with real estate, you mentioned the importance of more housing starts. Can you tell us more about how this relates to inflation?

[Jimmy Jean]

Of course.

As I was mentioning earlier, we have estimated that housing starts need to be increased by 50%, immediately. Between 300,000 and 350,000 housing starts per year are required to be able to fill the needs associated with demographic demand.

As was pointed out earlier, we have a very restricted housing market. There isn't any surplus supply at the moment. What we have in fact is a shortage.

Everywhere, in all the major cities, there's a desperate shortage of housing. Demographic growth from immigration and the resulting establishment of households, have made the situation worse. The need to build more houses is not just essential, but critical.

At the end of the line, without enough effort to do that, the affordability problem, which would not arise in the medium term in more dynamic economies, is likely to continue, and it will diminish our ability to attract the talent we need. In the end, it's a cost of living issue.

That's why we believe it's an urgent concern, particularly for affordable housing. I also think that the time has come to think about our commitment to ownership. There are several models around the world in which people are tenants, without losing their ability to save for the future. It's cultural of course, but there comes a point at which, as a society matures, it becomes important to make decisions and find ways to look beyond the traditional models.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

I'm told that I have 10 seconds left. I will accordingly use them to thank you. We can continue our discussion in the next round.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Savard‑Tremblay,

Now we are going to the NDP and Mr. Blaikie for two and a half minutes.

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Thank you, Mr. Chair.

When we talk about affordable housing, it's important for us to know that in the 30 years prior to 1995, Canada, working with the provinces, built between 15,000 and 20,000 affordable housing units per year. Over the past 30 years, the federal government has hardly built any.

We need approximately 500,000 affordable housing units. If we were to build 15,000 to 20,000 per year for 30 years, that would give us approximately 500,000 affordable housing units.

Given that the market was used to build housing over the past 30 years, I wonder if it's even possible to deal with the affordable housing shortage with only market-based solutions.

Do you believe instead that we need a public investment program to build affordable housing outside of the traditional market?

[Jimmy Jean]

I believe that there will have to be more partnerships between various levels of government and the private sector. If we expect the private sector to build that many units on its own, it's likely to be difficult.

We see problems in terms of financing arrangements, particularly in Quebec. We think that effort is needed to develop more housing units, in co‑operatives, for example. The co‑operative model, which is not often used here but is widespread elsewhere, provides more affordable solutions. More units are needed for students and seniors, in addition to intergenerational models, in short everything that the current demographics require.

But beyond all that, discussion is impossible unless the labour issue is addressed. The construction industry is very labour intensive. About 20% of construction workers are aged 55 and over. It's a very physically demanding field.

At the moment, we need to ask whether there is really a very clear strategy for ensuring that the immigrants we welcome have skills suited to our needs, particularly in construction.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Jean.

Thank you, Mr. Blaikie.

Now we're moving to the Conservatives for five minutes, please.

Mr. McLean, welcome back to our committee.

[Greg McLean, Conservative, Calgary Centre, AB]

Thank you.

Thank you to all the people.

Mr. Marion, I'm sorry that you're not able.... I've always found your comments very astute, so I'm sorry you weren't able to be heard here today.

Let me ask a question of Mr. Gregory right away, following up on my colleagues' questions.

Mr. Gregory, interest rates are going up. House prices are down an average of 14%. This is a double-edged sword for Canadian house owners. When you talk about $350 billion in excess savings, can you tell us how much of that is tied up in houses?

[Michael Gregory]

It's unclear where the bulk of those funds is sitting. I suspect that as these excess savings are being accumulated, some of them end up becoming permanent savings, that is, not available to be spent on a ready basis, either invested in financial markets or in housing. However, it's not clear how much of that is actually—

[Greg McLean, Conservative, Calgary Centre, AB]

You are right. A good portion is in houses. Your $350 billion.... Where does that number come from as far as date goes? Is it prior to the 14% devaluation in housing in Canada, or after?