Industry Committee on Feb. 26th, 2008

[Paul Jenkins]

Perhaps I could first mention, Mr. Carrie, that when we were here last time, I think you had posed a question with regard to net migration flows within Canada. We said we would come back on that, and we did provide the clerk with a set of tables. I just wanted to let you know that we did bring back those numbers.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much.

[Paul Jenkins]

In terms of your question, again, the exchange rate is a price that is set in markets. A critical issue in certainly the conduct of monetary policy is to constantly ask, whatever level the Canadian dollar is trading at, why is it trading at that level?

Going back to the very first question, we know that a number of factors can influence the exchange rate—movements in commodity prices, the impact on the Canadian economy of the U.S. economy and the weakness we've seen there—so it truly is a relative price. We don't target any particular level of the exchange rate, but we do need to have a view as to what is moving it around and what would seem to be a reasonable range for the Canadian dollar to trade in based on the relationships we've seen in the past and the factors that can have that more lasting influence on the Canadian dollar.

In terms of our monetary policy report update—and again, I will stress that here I'm going to repeat what we said there—we are just going into our deliberations for next week's policy decision, and as always, we add up all the information that's available. But I do want to answer your question in the context of the monetary policy report update of January. In that report we indicated that we saw a trading range of around 98¢ as not being inconsistent with the factors that we think are fundamental in determining the movement of the Canadian dollar. Indeed, in putting that base case projection together, we assumed a level of 98¢ for the Canadian dollar.

John, did you want to add anything to that in response to the question?

[John Murray]

I don't have much to add, but I'll add a little.

As Paul indicated, it's hard to know where the exchange rate quote should be, but certainly there are forces that you can identify that can explain the appreciation we've seen, certainly the direction of movement over the last four or five years, and these are fundamental forces that in one way or another are impossible to suppress. If you tried to, they'd just manifest themselves in another way.

I think in our earlier appearance Paul presented a kind of counter-factual...and one of them concerned “what if”. What if the exchange rate, for whatever reason, were lower than it is now? What might some of the other consequences of that be? If it were dramatically lower, there's a possibility that what we'd see is an improved competitive position for manufacturing, and that sounds great, but we'd find an economy that would be operating in very high gear, with resulting inflationary pressures. I guess the only observation I'd make from that is that what you think you might gain through a lower exchange rate you could probably find yourself losing in the form of higher inflation.

So your competitive position, ultimately, in the manufacturing sector would not be much changed.

[Paul Jenkins]

The flip side of that, of course, is that if the Canadian dollar were viewed as trading above what you thought was reasonable, that would have negative consequences for the Canadian dollar and it would clearly be something we would have to take into consideration in setting monetary policy.

So you come back to the key issue of asking yourself why the Canadian dollar is moving, what are the factors behind it, what are the implications for the Canadian economy, and then factoring all of that into your decision-making.

[Colin Carrie, Conservative, Oshawa, ON]

Those are excellent answers. Thank you very much, gentlemen.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

Thank you again for appearing.

I was reading recently that this generation, our generation, is the first generation that has put its future in way of investment in what are essentially paper assets. We saw what happened this past year as a result of the U.S. housing crisis, where all those assets literally wiped out, for the most part, the gains we experienced last year.

I'm curious, and I know that what happened in the States is not indicative of what's happening in our housing market, and we have a much different banking system.

I want to specifically ask you to address international debt, what effect that has on our economy and our dollar as we service that national debt. Is it something positive, or is it something that we can leave? I'm talking about that $465 billion debt that we have as a nation.

[Paul Jenkins]

That's another very good question. Let me start by going back to what we experienced in the late 1980s and early 1990s. In this country we had something like 20 years of deficit financing at all levels of government. Our public sector debt levels accumulated to a level that was actually higher than the size of our Canadian economy, and we began to see the implications of that in terms of the performance of the Canadian economy. There is what we call a risk premium; interest rates were higher than they would be in the absence of that amount of borrowing.

We also saw taxes going up to finance the debt servicing. I can't remember the exact numbers, but the percentage of every tax dollar taken in to service the debt was very high. From a macroeconomic perspective, and that's really all we can talk about, we made considerable progress in getting that debt-to-GDP ratio down to levels that are actually lower than you would find amongst the G-7 countries, and from our perspective that's an important contributing factor to broad stable macroeconomic performance. I think from the point of view of preserving that sound macroeconomic framework that we have in place, we need to continue to keep a focus on keeping those debt levels down.

Indeed, my view would be to continue to get debt-to-GDP ratios down further.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

To what point? I think 60% was the ratio in the 1980s. We're approaching--

[The Chair, Conservative, James Rajotte]

There are 10 seconds left.

[Paul Jenkins]

I don't think in theory there's any ideal rate of debt-to-GDP ratio. I think the track we're on is a very good track, from that point of view, and it will continue to provide that macro stability that we need.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Van Kesteren.

Ms. Nash, please.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you, and good morning to both of you. It's good to see you again.

The issue of the dollar is of course something that's been very problematic for many in the Canadian economy, and of course with a 60% appreciation over five years, that's a very steep increase for any industry or sector, let alone an individual business to adapt to. Certainly we know that the U.S. economy is a factor, but I look at the documents from your last meeting, and there is obviously a very strong relationship between the rise of crude oil prices and the rise of the Canadian dollar. So that's obviously another factor driving our dollar upwards.

I remember last time saying that we were being hammered more than any other country. I was told at the time that other currencies had risen steeply as well. But what I didn't get to ask, and what I'd like to ask now, is whether or not it is true that we are, as an economy, uniquely dependent on the U.S. economy. We're about seven or eight times more dependent than Europe and about 20 times more dependent than Australia. Those were some of the currencies cited. Our dollar is up to a much greater extent versus the U.S. dollar than are currencies in Japan, Korea, Mexico, China, and Taiwan. So we are particularly hammered by the high Canadian dollar.

To my way of thinking, this is a crisis in some sectors. We heard it was a crisis for tourism and manufacturing. I know a number of small businesses are being affected. We already have a $30 billion trade deficit with China, and much of our market share is going to Asia.

We've also been told that the current conditions in the economy will have an impact two to three years down the road. So even though we've lost over 300,000 manufacturing jobs, these job losses will continue to roll out over the years to come. I'd like your views on that.

I just want to pose a question. Given that commodity prices are not the only factor but are certainly a major factor in driving our dollar upward, does it not make sense to channel some of that money into buffering the manufacturing sector, which is being disproportionately affected by commodity prices? Certainly when there is a crisis in the fishery or in the commodity sectors, we use the funds that are generated by taxes, often from Ontario in the manufacturing sector. Would it not make sense when manufacturers are in a crisis to reverse that trend today? I'd appreciate your views on that.

[Paul Jenkins]

Well let me pick up on that last point and then turn to John.

I think what is important to remember here--I'll use the word “shocks”--is that these developments we are facing as an economy represent the reality of what is going on in the world economy today. You just have to go back over the last 10 to 15 years and realize the extent to which we've had a series of developments. You can go back to the Asian crises, the default in Russia, the collapse of the high-tech bubble, even SARS and BSE. We had one case of mad cow disease that shut the border. We have these developments that in almost every case represent either an international development or a link to some international situation. So the issue is how we can best adapt to these changing circumstances, because we know economies are going to continue to have to face developments of a global nature. Canada is an open economy. We've relied on trade historically to grow and develop.

So the issue here is how we can best adapt to these changing circumstances, the reality of what's going on in the world economy. I believe one of the important aspects of that is to promote policies that encourage and promote flexibility within the Canadian economy and the ability to move resources from one sector to another in response to these global shocks.

[Peggy Nash, NDP, Parkdale—High Park, ON]

So you support channelling some resources from the energy sector into buffering the manufacturing sector.

[Paul Jenkins]

What I'm saying is that I support policies that promote the movement of resources from one sector to another in response to shocks. The more we can do to facilitate flexibility and adaptability, the better the Canadian economy will perform, the higher level of employment we'll have overall, and the stronger rates of growth we'll have. It's this issue of flexibility and adaptability.

We have an extraordinarily well-educated labour force. What we need to do is continue to provide policies that facilitate the movement of those resources across sectors, as required.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Thank you.

[John Murray]

Again, just very briefly, your final question or questions really ventured more into fiscal policy than monetary policy, and we usually don't comment on that. We take that as given.

Our mission in monetary policy, as Paul mentioned at our last meeting, is really twofold, but it amounts to one and the same thing: keep inflation low, stable, and predictable. But the other side of that is to keep the economy operating in balance on an aggregate level.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Don't you think our economy is really getting hammered right now because of the dollar?

[John Murray]

Certain sectors, without a doubt, are having a difficult time, but these are counterbalanced at an aggregate level, at least up to now, by some very strong positives in other regions and in other sectors.

[Peggy Nash, NDP, Parkdale—High Park, ON]

Isn't focusing only on commodity prices a very unstable way to run an economy?

[John Murray]

Well, these are real and persistent forces, it appears, and they do represent--

[Peggy Nash, NDP, Parkdale—High Park, ON]

Other countries have tried to counterbalance that. Norway is an example.

[The Chair, Conservative, James Rajotte]

Ms. Nash, let Mr. Murray answer.

[John Murray]

They do represent something that appears to persist that is a positive for many regions. And given our single policy instrument of interest rates, our mission is to operate at a very aggregate level and see how these negatives and positives balance out as we look ahead. It is with that view that we set interest rates. So even though it may have unfortunate consequences for some sectors if it persists, that's really not in our realm to deal with.