Finance Committee on March 23rd, 2023

[The Chair, Liberal, Peter Fonseca]

Thank you Mr. Jean and Mr. Baker.

Just before we go to the Bloc and Monsieur Savard-Tremblay, I have another little update. The entire BMO Capital Markets has some firewall issue, and the whole department is down. Just be aware of that.

I just want to say that the clerk and his team do an incredible job in terms of inviting the witnesses we put forward to them. That being said, when we have invited these witnesses, over the last while we have given them the option to appear virtually. With the members' indulgence, I can ask the clerk to emphasize that it would be better to have them here in person. We will do everything we can to bring them here in person.

We're grateful for the witnesses who have come before us today virtually. We can see, when we do have technical challenges, that members really want to hear witnesses' testimony for our report.

We will do that going forward. We'll maintain the practice of emphasizing that we would like to have people here in person. Nothing beats having people in person. I think all members would agree with that.

Okay. That's great.

We're going now to the Bloc for two and a half minutes, with Mr. Savard-Tremblay.

Go ahead, please.

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

Mr. Jean, could you briefly answer with one wink for yes and two winks for no.?I'm joking. Use words, not winks.

You said earlier that you expected a moderate recession. You were talking about Canada, but what are your forecasts for Quebec specifically? What do you see in your crystal ball? Which sectors are at greatest risk?

[Jimmy Jean]

In fact, according to our baseline forecast and the latest published forecasts, we are expecting a mild temporary recession. What's happening in banking, particularly in the United States, and its ramifications on the economy, may in fact lead to a moderate recession, in other words, a typical recession.

As to your question about Quebec specifically, there is negative growth of 0.2%, hence a 0.2% drop in real GDP growth. For Canada as a whole, the increase is 0.6%. Quebec accordingly does not have any less exposure to current risks. There was a strong correction in the real estate and other markets, in terms of housing starts, and we are expecting that to continue.

Consumers have been showing a great deal of caution. Not only have plans to make major purchases been put on hold, but they are at a record low. Household confidence has not yet returned.

What's keeping the Quebec economy afloat is the labour market. That's what has been preventing a disaster for the time being. Once again, some time-lag effects may have an impact on labour market resilience.

The good news is that there is a labour shortage. Many companies may find themselves in a better position to retain workers or to go looking for more talent. That should mitigate the increase in the unemployment rate that we are expecting. That's why we anticipate that it will be slight and temporary, but don't think it will be entirely avoidable, in Quebec or elsewhere.

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

Okay.

Thank you, Mr. Jean.

[The Chair, Liberal, Peter Fonseca]

Thank you, gentlemen.

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

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

Thank you.

Monsieur Jean, following up on that theme of recession, I'm wondering how recession-ready you believe Canada is.

We know that automatic stabilizers can help a lot in the case of a recession, particularly when we start to see higher levels of unemployment. We know that the government recently took the employment insurance system out at the knees when it ended the temporary pandemic measures in September without replacing them with a proposal for modernizing EI systems. We hear that a recession is coming. We know EI's not ready. We don't have a timeline on when the government is going to replace it.

I'm just wondering, in respect of EI or other measures that you think would help mitigate the negative consequences of a recession, how recession-ready Canada is. What are some of the things the federal government could be looking to do to better prepare the country for a recession?

[Jimmy Jean]

There's the question of mitigation. Do we really want to mitigate or prevent a recession? I think that's a fair question to be asking.

I actually happen to believe that a recession is necessary to rebalance the economy. As Mr. Gregory mentioned, the fundamental problem is that demand and supply are not in balance. A recession is typically the only solution that we know works to get those parameters into balance.

For sure, we don't like the idea that—

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

I'm sorry, but I'm just going to interject.

I think that's easy for a lot of folks around this table to say, but for the people who are going to bear the brunt of that in terms of their household finances and their children's future and all of what that means for individual Canadian households, as a policy-maker in Ottawa I feel an obligation to try to understand how we might mitigate those very real and negative consequences for Canadian households. Even if we experience recession and that may help better align supply and demand, we want to do so in a way that maximizes the number of Canadian households that come out the other side solvent and ready to take advantage of the post-recession opportunities. I'm wondering if you might be able to speak a bit to what things we can do in order to encourage that outcome.

[The Chair, Liberal, Peter Fonseca]

Could you do so with a very short answer, please?

[Jimmy Jean]

I would say that certainly improvements in the EI system to make it broad and inclusive in line with the ideas that were put forward during the pandemic would be one way. We don't have the same type of job market that we used to. We have a lot of gig workers and things like that, and we have to make sure they are included.

That being said, we also have realities coming out of the pandemic, in terms of our debt and in terms of our deficits, so we have to be mindful of that. We saw what happened in the U.K. We certainly wouldn't want something like that to happen here.

As I said, I think structural conditions make it such that we can avoid a very bad recession, largely because of our tight labour market and aging population.

[The Chair, Liberal, Peter Fonseca]

Thank you.

Thank you, Mr. Blaikie.

Now we go to Mr. Morantz for five minutes.

Go ahead, please.

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

Thank you, Mr. Chair.

I want to speak to Mr. Marion.

Are you still there, Mr. Marion? I see that your screen is blacked out.

[The Chair, Liberal, Peter Fonseca]

You could pose questions to Mr. Marion.

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

There you are. Thank you.

A great thing about this situation is that I get to talk, and for me as a politician, that's never really been a problem. I'll just pose my questions to you. I apologize again for this, but perhaps you would be so kind as to respond to them in writing and send them to the clerk of the committee. Just give a thumbs-up if that's all right with you, Mr. Marion.

All right. First, I want to touch on the link between fiscal and monetary policy and interest rates, because I see this as a continuum. There are many historical examples, but I think back to what happened in the Republic of Myanmar after World War I, when they had hyperinflation, essentially because of loose monetary policies.

In Canada we saw the Bank of Canada embark on a historic program of quantitative easing and acquiring bonds in an attempt to keep interest rates low. We saw the Government of Canada spend over $500 billion in deficit over two years. I had a chance to question Tiff Macklem in committee a couple of months ago, and he confirmed that if government spending had been less, inflation would have been less.

Now, the reason this is important is that when inflation takes hold, central banks really don't have a lot of options in terms of how they can get it under control. They can increase interest rates and try to sell off some of the bonds they acquired—what they call quantitative tightening—in an effort to reduce the money supply they spiked through their easing program. I'm just wondering if you could respond in writing as to whether you generally agree with that analysis. That's my first question for you.

My second question for you is this: When there's daylight between the overnight bank rates in the United States and in Canada, what effect does that have on the Canadian dollar? My understanding is that when the overnight rate in the United States is higher, the return on bonds is higher. You'll see capital migrate to where it can get the best return, which means that would reduce demand for the Canadian dollar and likely weaken the Canadian dollar.

Now, there's only a quarter of a point spread right now, but I'm concerned that if Mr. Powell decides to continue to increase interest rates in the United States—and we heard that demand is a bit more stubborn in the United States than in Canada, so he has not taken that off the table and we're in a pause situation right now—at what point would daylight between the two overnight bank rates cause a fleeing of capital from the Canadian dollar to the U.S. dollar? That's my second question.

My third question has to do with foreclosures, because we really haven't been able to get a straight answer on this, and we have, really, the perfect storm. We have negative amortizations. I've never heard that term before. People are making their payments, yet the amount they owe is going up every month. We have housing prices that spiked and then dropped dramatically. We have, from all indications, an impending recession. Some think it might be mild, but there will certainly be a slowdown in the economy. I'm wondering if you could maybe provide your opinion as to whether you think this will cause a spike in foreclosures, if more Canadians could be losing their homes because of this, and what the impact of this might be on their personal finances.

Is that five minutes?

[The Chair, Liberal, Peter Fonseca]

You're at three minutes and 37 seconds.

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

That's only three minutes and 37 seconds. Well, that's all I have to ask. Those are my three questions.

Again, would it be okay, Mr. Marion, if you could respond to those three things in writing?

[Stéfane Marion]

Of course, I can do that.

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

Okay. Thank you very much.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Marion.

We have a witness: Monsieur Jimmy Jean.

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

Oh, I'm sorry, Mr. Jean. Since I have another minute or so, can you answer all three of those in 60 seconds?

[Some hon. members]

Oh, oh!

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

Pick one.

[Jimmy Jean]

I can comment on Canadian versus U.S. interest rates.

First of all, it's not unusual or unexpected, because markets are quite positioned for that. We've seen the Canadian dollar weaken, but not directly as a result of the policy differential. As I said, it's not unusual. You see that in every cycle. When we're at the end of the cycle, interest rates are higher in the U.S. than they are in Canada. Right now, the Canadian dollar is weak and the U.S. dollar is strengthening because of risk aversion. We've also seen that during the pandemic.

The second thing is that our household debt realities in Canada are very different from those in the United States, as we discussed earlier. Because of that, the Bank of Canada cannot.... Each 25-basis-point hike bites more in Canada than it does in the United States.

The third point I would signal is this: Regarding the quantitative tightening the Bank of Canada operates right now, our research demonstrates that it's more biting in Canada than what the U.S. is experiencing, this year, for technical reasons related to the debt ceiling. In other words, even if rates are constant, another way the Bank of Canada enacts tight monetary policy is through quantitative tightening. That hasn't stopped.

For all these reasons, the dosage of tightening we're currently seeing in Canada is appropriate, I think. The Bank of Canada need not worry overly about what the Canadian dollar does in the very short term.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Jean and Mr. Morantz. You got a lot out of that minute.

We'll now go to the Liberals and MP Chatel for five minutes.

[Sophie Chatel, Liberal, Pontiac, QC]

Thank you very much, Mr. Chair.

Once again, I'd like to thank Mr. Jean for being here. We are extremely lucky to have him here, despite the technical difficulties.

Mr. Jean, I've been truly impressed by your testimony so far. I'd like to go back to where we were earlier. You mentioned that the recession should be mild and temporary, which is reassuring.

What can we expect in 2024, during the anticipated recovery?