Industry Committee on Feb. 26th, 2008

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

Do I have time for one more quick question?

[The Chair, Conservative, James Rajotte]

You have five seconds. We'll have another round, though, Ms. Nash.

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

Will we? I'll save my question for next time.

Thanks very much.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Simard, please.

[Raymond Simard, Liberal, Saint Boniface, MB]

Thank you, Mr. Chair. I'll be splitting my time with Mr. McTeague.

If I could, I'd like to ask both my questions and then have you answer, if that's possible.

We talked a lot about the manufacturing sector and the challenges in Quebec and Ontario. I'd like to speak a little bit about western Canada. What I'm hearing from people who are dealing in Alberta, for instance, is that their clients are down 15% right now. The oil industry, obviously, is very strong, but we're hearing that in fact the other industries are starting to feel the slowdown at this point.

First, could you tell me if my analysis is right and if what I'm hearing is right? Do you monitor this kind of thing? It would be very important to monitor it, because you could just assume that since the oil industry is going well, the whole province is doing well.

We're hearing the same thing in Manitoba, by the way. Some people who are in business in Manitoba are telling me that in the last four or five months there was a very definite slowdown. They're capping basements in Edmonton, I am told. They have built these foundations and there are no people to buy them, so they are capping them now for future use.

My second question is on labour productivity. We all know about this 26% gap with the States that is growing. When you're looking at your interest rate decisions, does that have an impact on Canadian productivity? Is this one of the issues you factor into your decisions? Hopefully it is something we will study here at this committee at one point. It is one of the most important factors in our economy, and I would like to dig down a little bit deeper.

Could you maybe answer those two questions?

[Paul Jenkins]

Let me answer your first question, and I'll turn to John to answer your second question.

We do monitor what goes on across the regions very closely. We have regional offices across Canada. We have offices in Vancouver, Calgary, Halifax, Toronto, and Montreal. We have a group of analysts in each of these offices that each quarter actually goes out to interview companies. We have a survey they conduct that we actually aggregate up and publish. We call it the business outlook survey.

We are out there on the ground talking to businesses on a regular basis in terms of how they see things. This is very valuable information. It's not hard data in the way you might think of the consumer price index or the employment numbers. It's more anecdotal, but it's very timely information, because a lot of the other statistics are for the month behind us or for two months behind us. We do monitor that very closely. Indeed, the sentiment you have expressed with regard to slowing, certainly in terms of housing construction, we do see. I remind you that house price increases in this country are still running at a fairly high rate. They are very close to double-digit. So there is still some demand pressure in the housing market that you see in terms of these price increases. But in terms of activity, you do see signs that there has been some slowing.

Yes, we do pay very close attention to that.

On productivity, the answer is that we pay a lot of attention to that as well.

[John Murray]

We pay attention to productivity because of course that plays an important determining role in the potential of the economy, how fast we can grow on a sustainable basis. It's also the source of most of the economic progress or material gain that we experience. As we're more productive, we expect our salaries, wages, and profits to go up, so that's the major source of growth and economic well-being. So that's important.

You asked a slightly different question that had kind of a twist on it at the end; that is, whether interest rates as set by the Bank of Canada have an effect on productivity as opposed to whether productivity has an effect on how we set monetary policy. That's a little trickier question. You could think, well, low interest rates would encourage investment and capital deepening and that would be productivity enhancing. As far as the analysis goes, that's okay, but of course that doesn't go far enough. If the suggestion would be to lower interest rates as far as you can to get productivity and investment as high as you can, you can see the potential problem there. To the extent that it led again to inflationary outcomes and higher risk premiums, you'd actually, in the event, wind up driving interest rates higher rather than lower in the end.

Our policy—and we return to this again and again, I know—this low, stable, and predictable inflation, is a key for keeping interest rates down on a sustainable basis and doing what we can, in our way, at the Bank of Canada to promote productivity and growth.

As an aside, with reference to the dollar, because this committee is of course talking about the strong dollar, one of the things that we've noted in our monetary policy reports, and that has been noted by others, is that an advantage of a strong currency is the cost of imported machinery and equipment, which is important for this capital deepening process. The price of those does go down, so you can regard that as potentially productivity enhancing.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go now to Mr. Stanton, please.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you, Mr. Chair.

I realize you said you don't normally like to comment on fiscal policy, and I hope I don't tread into that water. For a layperson, it's not always easy to make the distinction, but I think I have a bit of a handle on it. But picking up on this whole discussion, I actually had an occasion last week to have some meetings with manufacturers and producers in my riding, and the whole issue of the strong dollar came up as a real barrier to their continued success.

Going back, you made the comment that keeping this broad, stable, macroeconomic performance was the key target to withstand some of these pressures that we're going to experience. It raised the question for me in the political discussions that have been going on this past week or so about the notion that the government has taken the approach of lowering taxes and trying to create that more stable economic circumstance for the country. Opponents to that approach have suggested that there needs to be more budget surplus by which the government would be in a position to make more robust interventions into backstopping potential economic weakness. From your point of view, which is the better approach?

We have a situation here where government is trying to create a low-tax climate, a business climate that's dynamic, as opposed to the approach that may have been taken in the past, where governments could have a lot of dollars available at their disposal to come and invest in specific interventions in specific sectors.

Could you comment?

[Paul Jenkins]

I think you have crossed the line in terms of what a prudent central banker would comment on.

It's certainly not our role to comment on specifics of fiscal policy, tax cuts versus expenditures, and so on. Our focus is very much at the macro level. Really, I can only repeat what we've said before, that from our perspective what is important is that we have a very solid, predictable, macroeconomic framework within which decisions can be made. So I'm afraid it would be imprudent to answer your question.

[Bruce Stanton, Conservative, Simcoe North, ON]

What is not often understood by the people I work with and hear from in my riding—and even in general circles around this place—is the notion that the government of the day has some kind of ability to influence not only the exchange rate but decisions involving the Bank of Canada on interest rates, for example.

Could you comment on just how independent that whole relationship is?

[Paul Jenkins]

We do have an agreement in place with the government, and it is tied explicitly to our inflation target of 2%. In November 2006, the government and the Bank of Canada issued a joint statement indicating that the inflation target for the bank for the next five years would continue to be 2%, as defined by the consumer price index. It's important that the policy goal of the central bank be in agreement with the government of the day.

We've been operating with that 2% inflation target almost consistently since we moved to inflation targeting in 1991. The first few years we called it inflation reduction targets because we wanted to get inflation down and keep it down. We've been operating with 2% for a number of years, and we have some interesting research under way looking at that.

With that agreement in place, it's very clear when you look at the Bank of Canada Act that the Bank of Canada has the authority to make the interest rate decisions that it deems to be consistent with achieving that 2%. We are obviously then held accountable for achieving that 2% inflation target through the decisions we take.

[The Chair, Conservative, James Rajotte]

You have 10 seconds.

[Bruce Stanton, Conservative, Simcoe North, ON]

How often is that objective renewed or reviewed?

[Paul Jenkins]

This one and the one before that were each for a five-year term. So this one extends to 2011.

[Bruce Stanton, Conservative, Simcoe North, ON]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Stanton.

We'll go to Madame Brunelle.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Good morning, gentlemen. I am glad to see you again.

I am a bit worried about the high price of oil and the rise of the dollar. Sudden fluctuations have brought about a major crisis in the manufacturing and forestry sector. You have a lot to say about stability, as it is your role to ensure it. This is the key word. Are we to expect a period of stability for the dollar?

The manufacturing sector took advantage of the low dollar for years. Have we learned the lesson regarding the rising dollar? Are the companies ready to adapt to sudden fluctuations, either up or down, of the dollar? We hear little about the rising dollar. Just like gasoline, it made headlines. Now, we are hearing less about it. Is this because there is stability or is it because we have gotten used to another inconvenience?

[Paul Jenkins]

First, the Bank of Canada's objective regarding inflation is to have a stable performance of the macroeconomy and a fairly substantial growth rate in jobs as well as in all the other important factors of economic performance.

In 2008, the economy's growth rate will be weaker than it was last year. In our report on monetary policy, the reference scenario shows a 1.8% growth rate for 2008. In 2007, it was 2.6% and in 2006, it was close to 3%.

There are two main reasons why growth will slow down. First, there will be a period of weak growth in the United States because of the residential crisis there. As I mentioned, net exports will make a negative contribution in 2008 because of the slowdown in the American economy. 2008 will be a year of slower growth, but according to our forecast for January, the growth rate is positive, but not as strong as it was in the past because of the disturbance in the United States as well as the situation on the credit market and on the world financial markets that are also impacting negatively on the Canadian economy.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Therefore, would you say that the Canadian dollar should remain on a par with the American dollar for some time?

[Paul Jenkins]

We have no objective in mind regarding the dollar. There are always positive and negative factors influencing the dollar. Commodity prices are very high, but at the same time, the slowdown of the American economy is a negative factor for the Canadian economy and, consequently, for the Canadian dollar.

Let me repeat that we aim to adopt a perspective that takes into account all the factors that influence the Canadian economy.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Brunelle.

Mr. Jenkins and Mr. Murray, we have three more questioners. We'll try to be as brief as we can. I know we're extending past your hour.

[Paul Jenkins]

We'll be short.

[The Chair, Conservative, James Rajotte]

I apologize for going past the hour, but we did start a little late, so we appreciate you staying here.

I'm going to take the next Conservative spot and ask you to comment on the fact that many people in the Canadian investment community and the financial markets have been critical of the fed in the U.S. and the amount to which they've changed their rates. From a Canadian perspective, the differential in the rate or the changes they make put pressure on the bank with respect to monetary policy.

I know you are very hesitant to be critical, but perhaps you can comment on the rates that were set by the U.S., the extent to which they've made the moves, and the kind of pressure they've put. As guidance for the committee, maybe you can give us some sense of monetary policy as a balancing act.

Inflation is one of the two pillars, along with a flexible currency, but if you look at inflation being a primary determinant, you also look at the strong dollar and its impact on the manufacturing sector. I know you take that into consideration, but then you look at the actions of the U.S. with respect to the spread between Canada's overnight rate and the U.S. federal funds rate.

Can you give us a sense as to how much other factors weigh on your decision--I know you're going to say inflation is a primary one--and if there are any other factors the committee should be aware of?

[Paul Jenkins]

That's a lot in a short period of time.