Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 9 - Evidence - April 30, 2014
OTTAWA, Wednesday, April 30, 2014
The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:22 p.m. to examine the present state of the domestic and international financial system.
Senator Irving Gerstein (Chair) in the chair.
[English]
The Chair: Good afternoon, senators. I call this meeting of the Standing Senate Committee on Banking, Trade and Commerce to order.
Today, we are pleased to welcome Mr. Stephen Poloz, Governor of the Bank of Canada, and Mr. Tiff Macklem, Senior Deputy Governor. They are here to discuss the Bank of Canada's economic projections and its most recent Monetary Policy Report and to give the committee an update on the overall health of the Canadian economy.
Before I turn the floor over to the governor, I would like to bring to the attention of colleagues two important milestones in the careers of both the governor and Mr. Macklem. The first, coming this Friday, May 2, marks one year — the first anniversary — since Mr. Poloz was announced as the next Governor of the Bank of Canada.
Second, today is Mr. Macklem's last day as Senior Deputy Governor. Within the next few months, Mr. Macklem will become the Dean of the Rotman School of Management at the University of Toronto.
I know that I speak on behalf of all members of the committee when I thank both of you for your service to the bank.
With that, I turn the floor over to the governor for his opening remarks. Governor, the floor is yours.
Stephen S. Poloz, Governor, Bank of Canada: Thank you very much, and thank you for the opportunity for Tiff and me to be here today to share with you the highlights of the recent economic outlook that we've published.
The bank aims to communicate openly and effectively so that Canadians know how we are achieving our mandate to promote the economic and financial welfare of this country, and I think one of the best ways we do this is by appearing before this committee and answering your questions.
I'll discuss the bank's outlook for inflation and then move on to our outlook for global and economic growth for Canada. We'll touch on some recent bank research and finish with the trends that we are observing in that respect.
To begin with inflation, inflation in Canada remains low. We expect core inflation to stay well below our 2 per cent target this year, and we'll return to target over the next two years. In contrast, total CPI inflation will move closer to the target of 2 per cent in the next few quarters due to some temporary factors.
Let me explain these two differences. We expect that economic slack and heightened retail competition will continue to keep core inflation well below target until early 2016. At the same time, higher consumer energy prices, primarily gasoline and natural gas, plus the effects of a lower Canadian dollar will contribute to pushing up total CPI inflation very close to target. Total CPI inflation, we expect, will remain pretty close to target throughout our projection period. This will happen even as the upward pressure from energy prices will be dissipating because the impact of retail competition will be fading from underneath and excess capacity will be absorbed. With those two effects, core inflation will gradually make its way up to 2 per cent and catch up with total inflation from below.
[Translation]
Moving to our economic outlook, global growth should gather steam in the coming three years as the headwinds that have dampened growth dissipate.
Overall, we see global economic growth picking up to 3.3 per cent in 2014, moving to 3.7 per cent in 2015 and 2016. In Canada, real GDP growth is expected to average about 2.5 per cent in 2014 and 2015 before easing to around 2 per cent.
These numbers are essentially in line with the bank's January outlook, but they do not reflect the actual quality of the outlook, which has changed in meaningful ways, especially for emerging market economies in Europe.
Growth in Europe is modest, but inflation remains too low, and hopeful signs of recovery might be stalled by the Russia-Ukraine situation.
[English]
China and other emerging economies are showing solid growth, but there are some concerns about financial vulnerabilities, specifically increased market volatility in response to political uncertainty.
In the United States, the economic recovery is proceeding as expected, despite recent softer results largely, we think, due to unusual weather. In fact, private demand could turn out to be stronger than we had originally thought.
The issues that Canada's economy faces are not unfamiliar to you. Competitiveness challenges continue to weigh down our export sector's ability to benefit from stronger growth abroad. Given the importance of the export sector to an open economy such as ours and given the growing wedge between Canada's exports and foreign demand, the bank has deepened its analysis of the export sector, specifically non-energy exports.
By breaking down the non-energy export sector into a large number of subsectors — 31, in fact — interesting facts and trends emerge. To start with, we are discovering that there are some subsectors, such as machinery and equipment, building materials, commercial services, aircraft and aircraft parts, that are running in line with fundamentals, or in some cases doing even better than their respective U.S. benchmarks. This suggests to us that, as the U.S. recovery gathers momentum and becomes more broadly based, many of our exports will indeed benefit. The lower Canadian dollar will also contribute to the recovery of some of these subsectors.
Other subsectors, including auto and truck makers, food and beverage suppliers, chemicals, will also be helped by a lower dollar, but this will be to a lesser extent since they are experiencing greater competitive challenges so their recovery will be slower.
The big picture tells us to expect a gradual convergence between the growth rate of Canada's exports and that of the U.S. economy, but this more granular research indicates that the wedge in the level terms between the exports and foreign demand will endure. This wedge is on the order of 35 to $40 billion of exports that have, in effect, gone missing.
Make no mistake, this wedge is real and it is big. The good news is that we now know more precisely where it is, and it lies with about half of our non-energy exports. The bad news is that these subsectors are doing worse individually than we thought before. This deeper understanding of our export sector is valuable, but it doesn't make us any less concerned about the challenges that lie ahead.
Looking forward, we continue to believe that the rising global demand for Canadian goods and services, along with an assumption that oil prices will remain elevated, will stimulate business investment in Canada and help shift the economy to a more sustainable growth track.
[Translation]
We continue to expect a soft landing for the housing market and Canada's household debt-to-income ratio to stabilize. Nevertheless, the imbalances in the housing sector remain elevated and would pose a significant risk should economic conditions deteriorate. We are observing, anecdotally at least, an increased awareness of this risk. Consumers are showing responsibility; for example, homebuyers are optint to buy less house than they qualify for so they do not find themselves overextended if interest rates rise.
Banks, as well, are underwriting loans more carefully, ensuring that people can service their debts if rates go up. So, while the risk could be significant, we are comfortable that it is not outsized.
[English]
To sum up, the bank continues to see a gradual strengthening in the fundamental drivers of growth and inflation in Canada, but this view depends largely on the projected upturn in exports and investment.
There's a growing consensus that, when we do get home, interest rates will still be lower than we became accustomed to in the past. This is because of our shifting demographics and, further, after such a long period at such unusually low levels, interest rates simply won't need to move as much to have the same impact on the economy.
With underlying inflation expected to remain below target for some time, the downside risk to inflation remains important, as are the risks associated with elevated household imbalances.
The bank judges that the balance of these risks remains within the zone for which the current stance of monetary policy is appropriate. As you know, we did decide on April 16 to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risk.
Just before Tiff and I respond to your questions, I would like to take a moment to say a few words about the man sitting beside me. Tiff's contributions to the bank started a long time ago as a new recruit with a fresh master's degree in hand in 1984, and when I hired him for the first time. His contributions throughout his career have been significant and we will miss him at the bank for his intellect and management skills, but we'll also miss a great friend to many of us, myself included.
We can rest assured that Tiff's contributions to the financial welfare of Canada will continue as the Dean of the Rotman School of Business, where he will be busy ensuring that the next generation of economists and business leaders are prepared to take Canada into a prosperous future.
Tiff did such a great job as senior deputy governor that to find his replacement we've had to split the position and look for two people to fill his shoes. I'm pleased to report that we will be in safe hands. I look forward to introducing you to Carolyn Wilkins, the incoming senior deputy governor, in due course. Carolyn will oversee the bank's strategy planning and operations and will share responsibility for the conduct of monetary policy.
I also look forward to working with our new chief operating officer, Filipe Dinis. He will be responsible for managing all the bank's administrative functions.
With that, Tiff and I are happy to take your questions.
The Chair: Thank you, governor, for your opening remarks.
Senator Black: Before getting under way with my questions, Mr. Macklem, I would also like to, on behalf of Albertans, thank you for the contribution that you have made. You are a model of public service and contribution to the greater good of Canada, and we owe you a debt.
As the governor has pointed out, the University of Toronto is extraordinarily fortunate to have you. Best of luck to you. You'll be missed in Ottawa but, as the governor also pointed out, we're looking to you to ensure that the next generation is better than we are.
The first question relates to an interesting article I read this week in respect of the risk of a bubble bursting in the Chinese housing market. If that were to happen, what are the consequences that you might foresee for our economy?
Mr. Poloz: We have highlighted in the Monetary Policy Report the risks in China as one of our high-level risks that we're monitoring carefully. It's maybe a little less precise than the one you mentioned, which is particularly related to housing, but it's more related to the financial system, which of course would be catalysed by the kind of risk you raise.
China, of course, has seen extraordinary growth for a long period of time, and we have had bumps before. In the big picture, they haven't really had long-lasting effects. They're the sorts of bumps that one sees in economies that are developing in that way.
The financial system has a number of vulnerabilities, and no doubt we would be making a mistake if we believe we would be insulated. We simply would not. I will remind you that back when the U.S. was going through its first rumblings in 2007 there were papers predicting that the world would be insulated from that, too, because the world has two tracks for growth. In fact, it turned out that we're more integrated than ever before.
We watch this carefully. The way this would work is there would be a disturbance that actually slows down growth in a meaningful way in China. Even if China slowed only to 5 per cent growth, which might still sound like a big number, that would have a pretty big impact on global commodity markets in particular. A lot of countries, including ourselves, will see a deterioration in what we call our terms of trade, which you would think of as oil prices and coal and a few other major exports. Resource pricing, relative to other things, would go down. It wouldn't just be us, of course. Brazil has terms of trade very much correlated with ours and Mexico and so on. A lot of countries would feel this.
For us the way it would impact immediately would be lower levels of income coming into the country through our trade, a significant slowdown in the economy, reduced investment in those sectors and a lot of uncertainty about how long it might last. There may also, of course, be consequences for our own banking system. The system is very strong, but there would be implications for them. So it's not a risk we take lightly.
When we say inflation is expected to take a couple of years to get back on target, it assumes that none of these sorts of things happen. If we were thrown off track meaningfully in that way we would need to re-evaluate the relative risks around household imbalances and risk to inflation. Inflation is already well below target and that would push it even further.
Senator Black: Governor, perhaps it was your comments in Saskatoon last week, which you amplified again today about this nature of — my words, possibly not yours — uncompetitive producers continuing to lose market share because of what you describe as ``the wedge.'' I understand the bank understands where those problems occur. I'm interested in why we've gotten to this circumstance. What is the problem here?
Mr. Poloz: That is a complicated question, and it varies a lot from firm to firm or sector to sector. But let's start at the basics. Canada has not had a strong track record in terms of generating new productivity growth. We're all aware of that. If we go back a generation, we have had something like 30 percentage points less productivity growth than the United States. There are many possible explanations for that. The economies are not the same, and there are lots of statistical issues. I won't go there.
The fact is we have, on average, under-invested, in productivity enhancing equipment, possibly infrastructure, all of the kinds of things that go into the competitiveness equation. But the more recent thing that happened is that the competitiveness of a company depends on their productivity, and fundamentally the costs at which they produce something. And their competition may be in Mexico or the United States, it could be somewhere else. If you're not keeping up and your exchange rate rises as well, then that will, in effect, make the situation worse.
What we have had since roughly around the crisis or a little before, as I mentioned, is a rise in our terms of trade, which is the global price of the resources we produce relative to other things.
Today our terms of trade, as we call it, is about 25 per cent above its average from the 1990s. The primary driver is world energy prices — oil — but it's not just oil.
Of course that's a positive thing. This is what my speech was primarily about in Saskatoon. It means that for everything we're doing, somebody out there is willing to pay us even more than usual on top of everything. And so today, Canada's average income is about 7 per cent higher than it would be without that rise in oil prices. Everyone benefits from this. But one of the consequences is that over long horizons, the terms of trade and the exchange rate tend to hang out together, so the Canadian dollar is above where it was 10 years ago for many reasons, but a really important one is the higher terms of trade.
That's partly how the wealth gets spread around. That increases our purchasing power globally through that mechanism. However, it means that if you're one of the companies that doesn't sell oil or other resources, your ability to compete with someone else has deteriorated regardless of what your underlying productivity is.
Now, that's part of the adjustment mechanism that economists understand. It means that for a period of time, measured in years, you would have a two-speed economy: the high speed resource economy, and the slower speed. Let's call it simply ``manufacturing,'' but it's more precise than that.
You would have this slower track, and the average would be what we get, let's say 2.5 per cent. Those adjustments take time and what happens is that more investment, more labour, move into the hot sector away from the cooler sectors. That's a process of adjustment which will continue even as the recovery continues. We will have these two speeds.
From a company's standpoint, they will see it as the dollar went up. I don't understand that, that's what did this to me. Of course, as you can tell, it's much more complex than that, but it is a very important factor and, give or take, two thirds of the loss of competitiveness is due to the currency over the past 10 years.
Senator Black: That was very helpful.
[Translation]
Senator Hervieux-Payette: Thank you. Once again I would like to welcome our colleagues, and, to Mr. Macklem, I would like to wish him good luck and, especially, much pleasure in his new job, and I would like to thank him for the excellent work he has done with us. Mr. Poloz, you have a huge task ahead of you. Your predecessors did an excellent job; these champions have set the bar very high for you.
There is a myth that I would like to clear up. We are told that the United States has continued to stimulate the economy, especially because of the impact of the economic crisis, and that rather than limit their spending they have continued to spend, whereas the World Bank, that pays an important role, has imposed significant restrictions on the recovery in Europe.
There seems to be a dichotomy between the way in which the United States has dealt with this issue and the role that the World Bank has played in perhaps slowing down economic growth in Europe.
Is it a myth to think that the horrendous restrictions imposed on Greece, for example, and probably also on Italy, slowed down the recovery and that in the end, the cure might have been worse than the disease?
Mr. Poloz: I think one has to look at this from the perspective of the shock that took place in the United States. This was a worldwide shock. I look at it as a financial bubble that affected the global financial market. After the bubble a crater was left that was the same size as the bubble. It is not a coincidence that the bubble took almost seven years to build up. I think it will take approximately seven years to correct this. That gives us two years for reconstruction and adjustments.
Durant that time, the shock made its appearance in Europe where the implications were different because the context was that there were fiscal problems in some European countries. Therefore, the adjustments, even though they were difficult to make in the United States, or even less easy to undertake in Europe because they were complicated by the fact that there was a risk of default on the part of the government. That is why austerity measures were taken and that is why I think we consequently saw examples of policies restricting growth rather than the opposite.
Furthermore, it is the mix of policies that is important. We have zero percent interest rates; that is very stimulative and I think it is the most important mechanism for correcting the situation. We can see the recovery beginning in Europe. It is still a fragile recovery and that is why we are saying that the Ukraine-Russia situation could undermine confidence, investments, et cetera, in Europe. So this fragile recovery is now at risk. At the same time, inflation is very low. This is a very, very difficult situation from a monetary policy perspective.
I do not know if that answers your question?
Senator Hervieux-Payette: It gives me a general idea.
Tiff Macklem, Senior Deputy Governor, Bank of Canada: I would like to add a few points. In the United States, the shock was a very big one. It is important to note that even though this was a very difficult and complex situation during the crisis, when you look at it now, you can see that they took some very aggressive measures: a highly accommodative monetary policy and very aggressive monetary stimulus.
They injected their own funds into their banks in order to increase the capital and they undertook very strict stress tests in order to restore confidence in the financial system. These measures took time, however now we can see that the American economy is becoming stronger and we see it in our forecasts. This is a reflection of the fact that they took those measures.
Several countries in Europe are taking measures but the political system is more complicated and it is taking more time. Now they have an opportunity because the European Central Bank is imposing stress tests on their banks. This is an opportunity to restore confidence in their banks. A recovery is happening, but it is happening later than that of the United States and it is more fragile, therefore there are more risks.
[English]
Senator Hervieux-Payette: The last question is: How is Basel III going? Generally, with all of these players, are we going in the right direction?
Mr. Poloz: Yes. I think there is absolutely no doubt that the financial system that we're working in today is a safer financial system than the one we had before. It has more capital. It has more liquidity, and it has a greater sensitivity to what's going on. At the root of it, we believe, was excessive leverage in the banking system, so all of this new regulatory architecture has already moved us into a better place. There are still more threads that are under way, which will come to a natural conclusion at the leaders' summit this fall in Australia. That will still leave some issues unresolved, but they're the bottom 20 per cent. The first 80 per cent will be largely complete this year.
You might say that that global movement — this is maybe too general — has mostly moved in what we call a ``Canadian direction.'' The characteristics that we point to, a more conservative type of risk culture, is what is captured in those new regulations.
Mr. Macklem: To give you a number, if you look at banks in North America and Europe — so largely U.S. and European banks — they've raised something like $660 billion of new capital, and that is very much a result of the fact that Basel has raised the capital and increased the quality of capital. There were a lot of critics saying that this would crush the recovery, this would prevent lending. In fact, it's the reverse. It has re-established confidence in the financial system, and that is a key part of the recovery.
Senator Tkachuk: Welcome, governor and Mr. Macklem. I wanted to ask a couple of questions. One is about the Canadian dollar, which has been dropping lately against U.S. currency, after being almost at par for quite a long period of time. You referenced the dollar yesterday, governor, as a factor that has contributed to a decline in the expected level of Canadian exports. I assume that the drop — I think it's 90 cents today — will help reverse that decline, although it's not the only factor. The decline will also mask another factor, which you refer to, which is productivity. This is a bit of a vicious circle. I used to have great conversations with Governor Dodge about the 65-cent dollar and what it would do to productivity. I don't know if that was a nightmare situation that still has repercussions today on the question of productivity, but I'm a fan of a strong dollar. I'm not a fan of a declining dollar, but, nonetheless, I'm not an economist. I'm just a simple politician from the Prairies who worries about the cost of imports and the cost of inputs, which, for us, are almost at all times imported from other countries, and, of course, this is increasing our input costs in the Prairies. Perhaps you could just talk about that a little bit, and then I have one more question. I'll try to keep it to two, Mr. Chair.
Mr. Poloz: Most of what you summarize there is exactly right, and it shows how complicated this question actually is. First, we don't get our choice in where the dollar will be in any way, shape or form. I mentioned before that the terms of trade has been an important driver of the dollar. Last week I likened that to walking the dog through the park. After walking the dog through the park — and you're the terms of trade and the dog is the dollar — on one of those leashes that stretches out and keeps coming back, what will happen is that the footprints through the park will look a lot like an economist's chart, where the dog's footprints keep crisscrossing yours. The important thing is that, when you come out of the park at the other side, you are still together. That's roughly the relationship between the terms of trade and the dollar.
Economists approximate this by putting the price of oil in an equation that describes how the dollar goes up or down, so there's a regularity in that relationship. But the true, fundamental thing is that it is resource prices, more generally, that cause that. When we look at the chart — there's a good chart in the January MPR that has the terms of trade and the dollar — you can see that, over the sweep of, say, 30 years, it's a very good approximation. So the terms of trade was very weak when the dollar was in the 60s, and the terms of trade is far higher now than it was. So the dollar is higher. There's no choice in this. The relationship is almost arithmetical, but there are periods where it seems to go a little further. The dog wanders a little too far to the left or a little too far to the right, and so those are the sorts of things we can't really explain very well. On that basis, it looks like, when it was up above parity, primarily it was because the U.S. dollar was weak against everybody. It was because the crisis in the U.S. that had pushed everything down there made Canada appear as a safe haven for investors and so on relatively speaking, and that seems to have pumped the Canadian dollar up a little extra than what this relationship would say. As the U.S. has regained its momentum over these last six to nine months, we have seen a bit of a reset in many currencies, not just our own. The Canadian dollar has come down approximately 10 cents from those levels, and it's as close as anything, I guess, to that long-term relationship between the dog and the master that I've described. It's not a very reliable model, if you like, but it's something that we can see over long periods of time.
So that's to say that I'm not a fan of the dollar one way or the other. It will be ground out as it is. We're going to focus on inflation, and, if we look at that, say, a year ago, we thought that, by now, exports would be a lot stronger. They have disappointed us. Based on the fundamentals, the U.S. economy has been recovering, but our exports have not. That wedge has grown now from 35 to $40 billion. That's how much we have not exported that we otherwise would have. That would have made a big difference to economic growth if that had happened. That has disappointed us, and, by us being clear about that revision to our outlook, markets have seen that. The implication is that that must mean that getting inflation back to normal is much further down the road than we thought before, and, as a consequence, markets have decided that the Canadian dollar should be lower. That's what has happened, but we had no idea how far it would go or what it should be. I hope that helps you appreciate that. It's a difficult question to answer.
Senator Tkachuk: I'll remember that dog on the leash story for a long time.
Mr. Poloz: It does help. It helps me.
Senator Tkachuk: I had read a couple of articles on this. I'm a politician, so I think I'm an expert or something. With the question of productivity, which has always been a concern of mine, we haven't been able, in all of our discussions, to put our finger on what we can do to improve that question, but it seems to me that, as we rely more and more on natural resources for our wealth — much like other countries that only have natural resources, like Saudi Arabia or Venezuela, rely on oil and everything else goes to hell in a hand basket, basically — it attracts more capital. It attracts the best and the brightest to the oil industry, because that's where the money is. Maybe that's part of our problem. We're not Hong Kong, where all the money is. There are no resources, so you have to put your brains to work and manufacture like hell and figure other stuff out to make a lot of money.
I think that may have something to do with it. I don't know if it does, but I'm wondering if there are any studies around that are looking at that. Resource prices are really good, so we're making lots of money. I think that's got to be attracting capital and attracting brains like crazy.
Mr. Poloz: That's exactly right. That's what my speech was about last week in Saskatoon, just to help people appreciate it. Those are forces which come from outside. It's not something we can choose to do or not to do, but the markets do the work for us, attracting the capital.
That part of the Canadian economy is expanding much more quickly than the rest of it for precisely that reason: because it's more profitable, better wages, better everything. Net movement, net migration, is to Alberta and Saskatchewan for those exact reasons. Those are natural processes of adjustment that you would be hard pressed somehow to resist.
The fact is that the level of productivity in the resource sector tends to be lower, on average, than it is in manufacturing. In manufacturing you can fine-tune your machinery and do your things higher, better equipment and all that, whereas in the resource sector you're drilling holes, and some of them work and some don't, so the level of productivity tends to be lower. There are higher levels of investment up front in order to get things to work in the end.
As the economy shifts its proportion of resources in the lower productivity sector, then the average level of productivity would appear to be slower than if that change had not occurred. So that's an important descriptor of our history, I think.
No doubt my expert to the right has some things to add to that, but it's important for us to bear in mind that there's no extra benefit to Canada to somehow stop these processes and try to be really productive in making something that no one really wants to buy, when in fact we could move into that sector and make it bigger and make more income for all Canadians. In terms of when trade shock comes and we get more money for our oil, those folks need a Tim Hortons, they need a pick-up truck, they need all the stuff for the kids and they spend it; therefore, the entire economy benefits. Every province has benefited, not just the ones that have the energy.
Tiff, would you like to add something to this?
Mr. Macklem: I'll just add a couple of things. You asked if there were some studies. There are actually endless studies. What they show, exactly as the governor said, is that one part of it is that when you're extracting resources you've got to keep going deeper, and so it takes more inputs to get the marginal resource out, and so the measure of productivity goes down. It's still a good idea if the prices are high and still a big benefit to Canada.
Having said that, you can't explain the whole productivity puzzle in Canada with resources, because if you look at productivity in other sectors, like the manufacturing sector, in the business sector and the service sector, we tend to underperform relative to our natural comparator, the United States. That's not to say that there aren't some extremely successful companies in Canada that are competing very effectively on a global scale: there are. If there were a few more of them, you'd see better productivity numbers.
[Translation]
Senator Massicotte: Thank you to you both for coming.
I would like to take this opportunity to thank you, Mr. Macklem, on behalf of all Canadians and Quebecers for your expertise and your commitment. You provide excellent services to Canada. I am happy that you have remained a good Canadian. It is very much appreciated.
I would like to come back to a topic that we have already discussed, and that is your projections and your model forecasts. It is all very reassuring. You have provided good explanations in response to our questions.
However I am not sure if I really feel reassured because even the governor said a few weeks ago that the model is broken. You used the words ``uncharted waters.'' You have already made the comment in the past that forecasts made four or five years ago showed steady growth. Yet if we look at the reports from the Bank of Canada or the European Development Fund, there is always a reassuring explanation for the past, even though the forecasts have continuously been wrong.
So the unexpected can happen, and as you said, perhaps the model no longer applies. We have a document of several pages that could lead us to believe that we know where we are headed but do we really know? Should we feel reassured?
You do not always seem sure about your forecasts. Perhaps this is because this is new, perhaps we are going to experience the same situation that Japan went through. Perhaps something is not working.
There is mention of exports and billions of dollars. Should we really feel reassured or should we simply say, thank you for the good read but who knows?
Mr. Poloz: I will begin by saying quite frankly that I do not really trust those forecasts. Forecasts are always a combination of judgement and models. And certainly the uncertainty is greater than usual.
It should not be surprising to say that because this was an extraordinary event, it is something that we had not predicted. It was not incorporated into our models and models cannot really explain the effect of these shocks.
However there are parts of our models that display some very fundamental behaviour, intrinsic factors that will not change; that is the behaviour of consumers and businesses. It is other levels of these models that were affected by these developments, however.
What happened was that these models were used as a starting point. They allow us to begin the conversation and to ask ourselves what is different from the past in what we are seeing. Can we develop satellite models to better explain developments since the crisis, for example, and invest in those models?
Second, we speak to people who manage businesses in Canada in order to understand what they are seeing and to observe what their reactions will be.
What we are hearing is that they feel very uncertain about the future. Based on their experience, they are hesitating to make investments and put their money on the table because they have been burned in the past. Even their boards are not allowing them to make investments because the situation is too uncertain.
So what we are waiting for is for confidence to increase. There has been an impetus to recovery in the United States and exports will increase. All these factors are present but they are not as reliable as they were in the past.
At some point in time all the dominos will be in the right place but it is difficult to predict exactly when that will happen. All the ingredients are there to make the cake but the cake has only just begun to be made.
Senator Massicotte: Two or three weeks ago you said that you were relying to a greater and greater degree on interviews with industries in order to make your forecasts because the standard model was not working well. Personally, I do not find that very reassuring.
Anecdotes are being used. I think the Bank of Canada has been doing this for years. More than 20 years ago I even participated myself and I asked for a certain number of documents in order to write up reports on your forecasts, your hiring plans, et cetera. However, these are far from being reliable or scientific because you based them on impressions from certain individuals. You even assess consumer confidence but that is not a good indicator of economic growth. People are constantly making mistakes. When you say that for 2014-15 there is a projected growth of 2.5 per cent, that may actually be 1.5 per cent or 3.5 per cent because it is based on anecdotal evidence. That is a 40 per cent margin of error. It is all very well to believe you until we find out once again that you are wrong.
Mr. Poloz: First, perhaps it has been your impression in the past that this is a scientific process, and that is somewhat exaggerated. Second, it was less scientific than today, but it is not zero. Some aspects of behaviour are very predictable. There is a portion that we cannot explain but at the same time there is a part that is quite predictable.
I referred to 31 export sectors, half of which display predictable behaviour along with the usual variables. It is the other half that is problematic. We can predict that the part that displays predictable behaviour will respond to the recovery in the United States, as usual. Perhaps even more so because the Canadian dollar has depreciated. We publish a forecast that we can measure, we present that forecast as well as its margin of uncertainty, which may boil down to one detail. Then we need to develop our monetary policy in order to minimize the risk in those areas of uncertainty. This is not a scientific issue or an engineering issue but rather a risk management issue. There is a better categorization of monetary policy than there used to be.
Senator Massicotte: I am wondering if every 30 or 40 years we are changing models. For 30 or 40 years now we have been relying on controlling inflation. If we control inflation, then eventually, with interest rates and the monetary policy, there will be economic growth. As you know, history is full of erroneous models; we are convinced that the model is accurate but perhaps in five years we will realize once again that we have the wrong model. Is this the case?
Mr. Poloz: Quite frankly I do not know. However I will say that there is something at the heart of these models that we will keep. When Tiff and myself were young, the bank's forecasting model was not based on oil wells. This was not in the model because historically it was not a very important factor in the behaviour of the economy. But over the years, the importance of the oil sector has increased and it is thanks to Tiff and the thesis he did at Western University that the bank integrated that into its model. That model is better than the one that used to be used. So now we are in a position where we have a much better understanding of the model than we did in the past.
Mr. Macklem: Perhaps it is time to craft a new model. For example, if you take exports, they now represent approximately $130, $140 billion dollars less than they would in a typical, or normal or average recovery. The biggest share of that amount, approximately $100 billion, can be explained by the fact that the recovery in the United States is the weakest it has been since the Second World War. If we integrate that reality into the model, we can explain approximately 100 billion dollars' worth of that weakness. However there is another factor that is more difficult to explain with our models and that represents approximately $30 or $40 billion. So the model is still useful but it does show what can and cannot be explained. We need more data and more experience in order to formulate and test other hypotheses that will improve the models. During that period, the best thing we can do is to speak to businesses and to decision-makers and get their perspective. It is not a perfect system.
Senator Massicotte: Thank you, Mr. Chair.
Senator Maltais: Welcome, governor. Thank you Mr. Macklem for the service you gave to Canadians and good luck for the future.
Governor, during your conferences and announcements, you often speak about improving manufactured products and manufacturers. Would a Canada-Europe free-trade agreement accelerate the production of manufactured products?
Mr. Poloz: Yes, in theory. That is generally the case. If you remove trade barriers, you create a wider market for exporters and manufacturers. At the same time, this increases competition because there are manufacturers who might be making the same product in Europe. There is a lot of talk about this competitive effect between manufacturers in two different countries. Specifically about who will benefit and who will have to reduce their production. But the most important aspect of a free-trade agreement is always that prices go down; consumers in both countries can buy anything and that increases demand for everyone. That is the most important thing. But it is difficult for a specific manufacturer to know what the result will be for him.
Senator Maltais: You also speak a lot about natural resources, particularly oil, which is a very important resource. But what do you think about the Canadian mining industry? For example, you specifically talk about mines in Quebec and aluminum manufacturing companies. Do you think that in the future the Canadian mining sector will take off once again and that aluminum prices will increase? Could that happen one of these days?
M. Poloz: For the mining sector, yes; I am convinced that the ``super cycle'' is one factor that will allow natural resource prices to remain high in the coming years. This is true of all resources: metals, energy, and so on.
Over the years, we have been able to monitor cycles in this area. They are difficult to predict, but we believe that the world will continue to grow and gain momentum and that prices will increase.
As far as the price of aluminum is concerned, that is a bit more complex. The new aluminum producers have a lower production cost because the cost of energy, in the Middle East for example, is a very important factor. It is difficult to predict the marginal cost of aluminum, but generally speaking, I would expect a price increase.
[English]
Senator Ringuette: Tiff, I can only reiterate what all my colleagues have said, and probably they can say it better than I can.
Reading up on predictions, a headline here is: ``Canada is losing foreign market share, missing out on about $40 billion in export, says the Bank of Canada Governor Tuesday.''
Then I read another article: ``Canadian trade forecast rosy, expert says,'' and that was a speech given to the Montreal Board of Trade by Peter Hall, Vice-President and Chief Economist of Export Development Canada. He predicts that export growth will be at 6 per cent per year for the next two years.
Would that only be in the energy sector? Because, on the one hand, you say that we're missing out on $40 billion of export. The bottom line is that it comes down to the question of model that Senator Massicotte was talking about.
Are Canadian experts looking at different models? You're saying we're lagging by $40 billion, and this guy says we have a very rosy forecast of 7 per cent growth for the next two years.
Mr. Poloz: We actually have a very good, collaborative relationship with EDC, as you can imagine.
Senator Ringuette: Yes, I was supposing that.
Mr. Poloz: Those two forecasts are actually very aligned with each other. Please let me explain. What we're talking about — our preoccupation here — is how much exports have not gone up compared to what we would have expected with our models — that error term, as Tiff has said. Out of $500 billion of exports, our error term is about 130 — 100 of which we understand because the U.S. recovery has been slower to normal. So 30 to $40 billion, out of $500 billion, is the so-called missing exports, which is significant. I'm not minimizing it, but we need to understand that we have models that explain most of it, as does EDC.
Our forecast is that exports pick up later this year and in the next year, and the growth rates aren't different, meaningfully. What we are concerned about is that that loss remains permanent despite those growth rates.
Our forecast is that, as things converge, growth in our exports will be about the same as growth in the United States, but that means that the loss of 30 to $40 billion remains permanent until such time as those competitiveness conditions turn around in those sectors that we've highlighted. So it's not just energy. There are a lot of other sectors that we've highlighted that will see this growth, and that is important to us because there is just enough growth in our forecast to close the output gap over the next couple of years, which will mean that inflation gets back to target. If, for some reason, that doesn't happen or happens less than that, we'll have to revise when we will get back to our inflation target.
There simply is no meaningful inconsistency between the two stories. It sounds a little different the way you summarize it. I understand that, but our growth in exports is very similar.
Senator Ringuette: I guess the other major concern and inconsistency that I find is that Parliament, six years ago, approved a corporate tax reduction with the caveat that it would give some cash flow to Canadian corporations for them to reinvest in their efficiency. A few years after that, we heard that they were sitting on that cash. They were not investing it.
Then Parliament approved — there were a few hundred pages in an omnibus bill — tariff reduction on necessary manufactured items. So there was a major reduction and a lot of elimination of these import tariffs so that they would buy the new, modernized equipment and gain efficiency. I'm looking at the result, and it doesn't seem to have had the impact that was supposed to happen.
What other means can Parliament put forth to foster efficiencies in our manufacturing sectors that would reduce that wedge that you're talking about, not only the current one but also the future ones? It seems that investment in Canadian manufacturing is not happening at a time where the cash flow was available to do so.
Mr. Poloz: It's a complicated question, which varies a lot from company to company, sector to sector, but let me try to at least fill in some of the blanks.
It is important to think of it from the point of view of a company. When is it appropriate for a company to invest in equipment that will add to their efficiency or increase their productivity? I would say at a time when the economy is in a severe recession or when the exports are 50 per cent what they were two years ago. So I'm describing 2009, 2010. It's not going to have much impact on that company. If they have no customers, they simply are not going to take whatever financing or cash flow that they still have remaining to invest in new efficiency because they don't have any customers to buy the product.
I described a company that survived, but we know that there are 8,000 or 9,000 exporting, manufacturing companies that simply disappeared during this down-cycle. We can't expect them to recover and invest according to our models because they're gone. So that's another complicating factor that we can't control. And there's literally nothing that Parliament could imagine doing to somehow stop that. We had a major recession driven by circumstances outside of Canada. That's very important, so it's risky to set it aside. But you need to understand the context during which these observations are created.
Let's ask ourselves: How does a company deal with its competitiveness, and what goes into its competitiveness? The answer is: Anything that affects a company's costs, not just their equipment. They could be competitive against the company that's across the street because they have just the right equipment and so on, but they might have not as good logistics for delivery to their customer, for example. They could have higher costs because they have trouble getting the right workers. You would be competing across borders. The exchange rate, as we discussed earlier, can make a big difference to what costs look compared to a company in the United States or Mexico. What about the cost of the workers? We have a case study that says a worker in Georgia or South Carolina, earning a much lower wage rate than somewhere in Ontario, has yet a better standard of living because it costs less for housing. How do we take account of these kinds of things?
When you're competing, if you have to pay workers so much in Canada regardless of what their productivity is and your competitor in the southern United States can pay a lower rate yet the workers have a better standard of living because of the cost of living in the area, then it's very hard to compete against that. What drives those costs might be things like infrastructure, the fees that we put on housing when you're creating a new neighbourhood, municipal fees, that sort of thing. All kinds of things go into that competitiveness picture, which of course are beyond all those macro things we try to pay attention to every day.
From a business point of view, if you ask them, ``Why haven't you invested?'' they have many things that are holding them back. As I said before, the first one is that they still are just barely getting more certain that the U.S. recovery is for real. That's the most important thing. All these other things are secondary compared to will there be customers for the things I'm going to produce? If I know I've got them, then it's time for me to invest, to add capacity, more efficiency. They've waited, and I think I understand why.
Senator Ringuette: Maybe we should have invested in infrastructure with that money so that the modern infrastructure for them to now invest in would be there.
[Translation]
Senator Bellemare: It is a privilege for me to be able to have a conversation with the Bank of Canada. I have two slightly different questions. The first follows up on the idea of Senator Massicotte, and the other concerns monetary policy in Canada.
My first question concerns your report on Canada's situation, but first I would like to say that I am thrilled with the way monetary policy is currently being handled. Recently, I felt reassured when reading about the position that you have adopted on exchange rates and budgetary balance, and more generally about the expansionary monetary policy that you intend to implement.
My question has to do with long-term issues, new problems that are emerging today. I am basing this on your short term forecasts, which could possibly teach us lessons concerning long-term forecasts. If you look at your short-term forecasts, you can see that domestic demand is the largest contributor to economic growth. But within that idea of domestic demand, there is also household consumer spending. When it comes to external demand, in other words exports minus imports, it is much lower. But it seems that your only choice, in terms of monetary policy, is to try to increase external demands.
Personally, it seems to me that there is a limit to what domestic demand, and particularly consumer spending, can generate in terms of economic growth. We remember the lesson learned from the bank's coordinated effort with Finance Minister Jim Flaherty, on the economic action plan 2008, through which we accelerated and increased public investment projects across Canada. This allowed us to get through the recession in better shape than other countries.
Given that, and given your general observation that it is better to be cautious rather than optimistic in your forecasts, when we look at the great crises of the past, and particularly the crisis of the 1930s, a long and significant period of world-wide stagnation which was ended by investments intended to respond to political problems that no one would ever want to experience again — it was a terrible war — we do not want to head in that direction and to wait for that kind of shock to get out of the crisis.
So my question is as follows: I remember that the OECD, during a G20 conference in 2008 or 2009, said that the best way to get out of this crisis — which is a unique financial crisis, I won't get into the details — was to align social and employment policies with tax and monetary policies. So in all countries, governments would intervene through their social and employment policies to create jobs, to support consumer demand, to have a tax policy of public investment and a monetary policy that responds to all of that.
What do you think of that? In other words, this was an argument against austerity measures in various European countries where it was said that cuts needed to be made because of public deficits, to avoid debt and defaults.
What do you think of that?
Mr. Poloz: That is an interesting question, of course. The conditions during the 1930s were different than those of today, obviously. But it might be possible that the solution is almost the same. I would say that the two most important aspects were that during the 1930s, governments had taken protectionist measures. There was a lot of protectionism. That is the first aspect.
The second aspect is that monetary policy was much more restrictive than it is today. Today, as Ben Bernanke said: ``Not on my watch'', and he is an expert on that period. It is true that we did not make those same bad decisions this time. At the same time, I suppose it is possible that the alignment was not perfect, but I think we can say that it was not bad. We largely avoided the worst. So it was not a perfect success, but it was the preferable route. We should not forget that; the situation is much better than it could have been.
Was it a perfect policy? That is a big question. I don't really know. It is obvious that the cycle is not finished; there is still time left — as I said, maybe two years, maybe more.
We are doing the best we can. I suppose that is not an ideal response, but —
Senator Bellemare: It is a good answer anyhow. My second question has to do with monetary policy. I am an admirer of the Governor of the Federal Reserve, Ms. Yellen.
Mr. Poloz: So I am.
Senator Bellemare: She is an economist and a labour expert. In 1976, the United States adopted legislation under which American monetary policy had to meet two goals: price stability but also employment, as much as possible. Between the two, there are arbitrations that take place. Recently, the United States changed their approach somewhat by setting targets.
I was wondering whether you agreed with this approach and if you would agree with the idea of adding job creation to your mandate. At this time, your mandate only includes price stability, even if you do take that into consideration. If it was included, would you agree?
Mr. Poloz: That is not officially part of our mandate. Our mandate pertains to price stability and the rate of inflation. In my opinion, these two are consistent. Our goal of 2 per cent inflation would be an objective in which the production gap would be closed and, I hope and I am convinced, would eventually close the gap in the labour market capacity as well. These things are therefore consistent. There is no true compromise between the two. It may seem so to observers but it is not the case. It is a false compromise in my opinion. In the end, all conditions will be optimal, with a rate of inflation that is stable, predictable and consistent with our goal.
Senator Bellemare: So, what you are telling me is that we could combine both objectives within the same mandate without any problem.
Mr. Macklem: Since you are an economist, I will tell you that there is not a Philips curve with long-term stability, so there is no compromise. Therefore, both are consistent. Even the Federal Reserve, in explaining its policies, states that its primary goal is to maintain well-anchored inflation expectations, because if they are not, there will not be job growth; there will be several problems in the economy. This is reflected in policies. The frameworks are not much different. They are explained a bit differently, but ultimately, they are based on the same objectives.
[English]
Senator Greene: Thank you very much for being here. My question is a little off topic, but it certainly relates to your work and the work the committee is doing. Our committee is engaged in a study of a digital currency, in particular the bitcoin. It's fair to say that the bitcoin is probably the first among many digital currencies. The bitcoin might transform itself into something more powerful and acceptable or maybe tomorrow there will be another artificial coin launched.
As a central banker, what is the impact of a digital currency on central bank operations on your forecasting and its effect on the supply of money?
Mr. Poloz: I'm going to preface the answer, and then I'm going to turn it over to Tiff, who has followed this subject very closely. It's a good opportunity for him to show you the stuff he knows the day before he leaves us.
As you've alluded to in your question, these are early days in this field. Our responsibilities are to the monetary and payment systems. So far digital currencies have not made it to what we would call money. They don't satisfy all those criteria. It's maybe better to think of them now as settlement systems or payment systems, in which case you compare their deficiencies and the risks associated with them. We're following that carefully. We've got a team analyzing those things and collaborating with researchers outside of the bank. We'll be launching a new website to share that with people and to encourage others to participate.
From my point of view, we've got a way to go before we need to be thinking about the policy implications of it. Anything like that requires that we be all over it in terms of what's going on next.
Maybe you would like to offer some specifics on that.
Mr. Macklem: It's a big question. We're very pleased that your committee is looking at this. There are potential implications for monetary policy. The Governor indicated they seem somewhat speculative and far off, but there are also implications for consumer protection, anti-money laundering, for a variety of aspects. It's a very good topic for you to be looking at. A couple of our colleagues have appeared, and as our research progresses in analysis, we would certainly be happy to come back.
I'm just on the cusp of leaving the bank. I started at the bank in 1984, 30 years ago, and through my entire career at the bank the demise of cash has been much predicted. There have been periodic innovations where people thought that we would be moving to a cashless society. Cash has been remarkably durable, even with the increased use of credit and debit cards. Now you have tap-and-go cards. It's true we're all using those more and cash less than we did 30 years ago. Nonetheless, cash has been remarkably resilient. If you look at the growth of cash in the economy, it has grown roughly in line with the growth of nominal income; so on the balance sheet of the Bank of Canada, which the big block of it is currency cash, it appears as liability on the Bank of Canada's balance sheet. That is matched with our assets, basically government bonds which we buy with the money, and since we earn interest on the bonds and we don't pay interest on the cash, that's our source of revenue, and economists call that seigniorage.
Getting to the consequences, if an alternative to cash were to gain significant traction and become a bigger part of the economy, our balance sheet would shrink, and the revenue, most of which we remit to the government because our expenses are a small part of what we earn in revenue. If you have a licence to print money, it's a very good business. Governments get the profits of that business. If our balance sheet would shrink, there would be less money going to the government.
Now, on the margin, that's probably not a big issue. This is getting very speculative, but at a certain point having a balance sheet is important for conducting monetary policy. It's important for conducting financial stability. During the crisis, for example, our balance sheet increased by about $40 billion because we set up various liquidity facilities to ensure that credit could keep flowing in the economy.
This isn't just the Bank of Canada; any central bank could be affected. Having said that, that seems pretty far off. The more pressing issues are around consumer protection, around potential for illicit uses, and more generally you have to think of electronic money. There are all kinds e-money, but there are also e-payments, person-to-person, business-to-business, and having innovation and improved efficiency in our payment system is a good thing. While you do want to make sure there is appropriate regulation and consumer protection, you don't want to stifle innovation.
There are certain applications of some global currencies that could be quite helpful; for example, payments of remittances which can be quite expensive. There could be some more efficient global means of doing that. That could certainly benefit the workers and their families back home.
It's something we need to watch closely. There are some countries that have started to introduce some regulations, and we're certainly looking at other international examples. It wouldn't simply be the Bank of Canada; it's also the Department of Finance. Much of this legislation would come under their responsibility.
You can also look at historical examples. I think you have had somebody come and talk to you about that in front of your committee, going back to where banks issued their own currencies and then eventually governments took over the issuance of that. There are good reasons for that.
It's an active area of research and analysis, and as I said, we would be happy to come back.
Senator Massicotte: In your report you have an annex or an addition talking about the effect of shale gas on our economy. As you know, Canada is proposing many pipelines to get its predominantly Alberta resources to international waters. We're having some difficulties, and who knows what will happen. How important is that issue? If it does not occur, what is the percentage effect on your GDP predictions?
Mr. Poloz: I don't have numbers for you on specific bits of infrastructure, but what we know is that the economy is already generating a great deal of GDP from the energy sector. We have had a relatively good convergence of Western Canada slack with global prices as delivery constraints have been eased primarily through the use of rail but also some pipeline developments.
If we have more capacity and there is more demand, having the ability to deliver will add directly to GDP; the investment related to it will add to GDP. That's something we could analyze if it was in front of us, and if we knew it was happening.
As you can tell, the economy has a pretty good engine going. In my mind, it's not a question of whether the economy goes into the dark or grows back. It's not a knife-edged thing, but one that would enhance our ability to deliver to a growing global economy over time.
Senator Massicotte: It's always important, but it's not materially important to the Canadian economy?
Mr. Poloz: I consider it important in the sense that we are operating in a constrained fashion, and so the economy is finding ways to adapt to that. It would be better if there were no such constraints, but it's a really hard optimization problem.
Our economy is doing quite well in that sector, so despite the lack of decisions on certain pipeline issues, would it be better? Obviously, in some form, and I wouldn't put a number beside it, but it's not as though if we don't get those decisions the thing stops. It's doing pretty well.
Senator Hervieux-Payette: If we want to create jobs, we need to be more competitive and to have more exports. Our market is limited. At home I have a German spouse who has family, and I go there often. I work with the Canadian Germany Chamber of Commerce in Canada. They have high salaries and social benefits that match our own. The euro is very expensive so we're talking about handicaps supposedly for export.
The only place where they have an advantage over us is manpower training, and also the partnership between government and business. Over there they have these chambers of commerce that they finance generously, but the companies are contributing to it, around the world, and they have a tradition; for a few years, they have been number two to China.
I think our own businessmen — the large ones like Bombardier, I'm not thinking of that — I am thinking about the second tier, and they are not necessarily familiar. Governor, you are more knowledgeable than all of us because you were in the export business. Do we have that kind of international network to support, educate and sell? Once we have solved the problem of investing and modernizing our companies, how are we going to come to grips with being competitive, not just relying on oil and gas?
Mr. Poloz: This goes pretty deep beyond monetary policy. You have highlighted Germany as an example, which is an economy that functions very well, and some of the things you've put your finger on are pretty obvious positives.
You mentioned manpower training. It's even broader. There is a very strong matching system. The associations of the Mittelstadt, the medium-sized companies, have very strong coordination about what skills are needed, what jobs are available, who apprentices for what, and it's all collaborated with the schools, and it seems to run extraordinarily well. I don't have a deep familiarity with it, but from that superficial observation it seems to work extraordinarily well.
You contrast that to our situation, and it's not that we have poor systems, but that we have a bigger issue. We have a much bigger country, much more diverse both geographically and sectorally. So the potential for mismatches or the kinds of adjustments that we need is greater than they have there. I will not deny your premise, which is that even though they seem to have high costs and typically a pretty strong currency, they seem able to deliver. Their level of productivity in that industrial sector is extraordinarily high. The investments they have made over time have paid well.
They also have really strong brand value. There are a lot of things that go into that. I suppose there are lessons for us in it, but I would remind you that our problem is a much more diverse and bigger country. The adjustment issues we face are much greater than theirs.
Senator Hervieux-Payette: You forgot the strong partnership between government and enterprise. I am thinking of Korea that has a very strong partnership. France has a very strong partnership with their businesses. It seems that here, maybe at the top level, but when it comes to lower levels, I don't think we assist our firms to fight the international fight.
Mr. Macklem: This is a little speculative, but when you look at the productivity puzzle in Canada, one thing you can see is that Canadian firms have tended to invest less in machinery and equipment than American firms, which is one of the key underlying drivers of productivity growth because it embeds new technology.
The other thing you see is that even where they have invested, we don't seem to be getting the productivity boost that some other countries have. One country that does very well in this respect is Germany. They do invest a lot, but they also get a lot out of their investments.
Speaking of these medium-sized firms, one of the things they seem to do in Germany — and do well — are firms that come into these firms and help them optimize their new machines, their processes. You don't get the machine and put it on the floor, switch it on and boom you have productivity. It's how you change your processes and take full advantage of the machine. There is a sector in Germany that facilitates this. I think that is something that is worth looking at.
[Translation]
Senator Bellemare: I was fascinated by table 1 in which the share of global GDP expressed in percentage is 20 per cent for the United States and 15 per cent for China. When do you think China will surpass the United States? Will that happen soon according to your forecasting and will it change the balance within economic policy?
Mr. Macklem: It has already changed.
Mr. Poloz: Things are changing very rapidly, that is true. We cannot ignore the importance of that reality. It is increasing. For example, if we look at China's rate of growth, it was 8 to 10 per cent five years ago. Everyone thinks this trend will continue, but we can see that rates of growth are lower than predicted, that is between 6 to 8 per cent. That seems much lower than 8 to 10 per cent, but the scope is so huge now that it places much greater demand on the global economy than previously. From Canada's point of view, it is not the rate of growth that matters, but rather the size of the demand.
Clearly, it will not take long for China to become the biggest. At the same time, the process of increasing personal income is much more important. That will take at least a generation, perhaps 40 years or something like that.
South Korea, for example, took 30 years to do it. It began in the same way as in Japan. In 1960, Japan was around 25 per cent when compared with the American standard of living. Thirty years later, in 1990, Japan has achieved the same standard of living as the United States. We will probably see practically the same phenomenon in China.
Senator Bellemare: Thank you very much.
[English]
The Chair: That concludes our questions. Governor, senior deputy governor, we express our appreciation for your being here today.
I usually conclude my remarks by saying that I express appreciation from everyone one around the table — and I'm speaking particularly to you today, Tiff — but I don't think I need to say that because you have heard each member of the committee express to you personally their appreciation for the service you have given to Canada and to the enlightenment you have given to our committee on so many occasions.
I must say I will look back on it not only recognizing your great intellect, but always with the most extreme grace.
I want to reiterate to my colleagues and to you, Tiff, that in my opening remarks I indicated that this is your last day at the Bank of Canada. I want to emphasize that what I did not say was that this would be your last appearance before the Banking Committee, whether it be bitcoin —
Senator Hervieux-Payette: Under his current title.
The Chair: Under the current title. That's what I'm saying. This would not be his last appearance, whether it be bitcoin, as Senator Greene raised, or other subjects that come up.
We look forward to seeing you back here at the committee, and again we express our greatest good wishes for your future. Thank you.
Senator Massicotte: I thought we should note given the importance of Tiff's contribution to Canada that he purposely chose to retire on a presentation to us. I mean, to his last minute. Obviously we're very important in his life, and he's showing his appreciation of our services.
Mr. Macklem: I will say it has been very much a privilege and we appreciate your interest in the Bank of Canada. Thank you.
The Chair: Before I terminate the meeting, tomorrow morning we are commencing at 10:30. The subject matter will be a study of Bill C-31, certain areas that have been devoted to us. Our opening comments will be from the Minister of Finance, Minister Oliver, plus officials. And we have received permission that we may sit for an extra hour if necessary because there will be a number of officials here. We will continue with our studies.
(The committee adjourned.)