Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue No. 55 - Evidence - May 1, 2019

OTTAWA, Wednesday, May 1, 2019

The Standing Senate Committee on Banking, Trade and Commerce met this day at 4:16 p.m. to study the present state of the domestic and international financial system.

Senator Douglas Black (Chair) in the chair.


The Chair: Good afternoon, colleagues, and welcome to members of the general public who might be watching these proceedings today. This is the Standing Senate Committee on Banking, Trade and Commerce. My name is Doug Black. I’m a senator from Alberta, and I have the privilege of chairing this committee.

I’d like the senators to introduce themselves, please, to the governor and the deputy governor.

Senator Klyne: Marty Klyne, Saskatchewan.

Senator C. Deacon: Colin Deacon, Nova Scotia.


Senator Mockler: Percy Mockler, New Brunswick,


Senator Duncan: Patricia Duncan, Yukon.


Senator Day: Joseph Day, New Brunswick.

Senator Bellemare: Diane Bellemare, Quebec.

Senator Dagenais: Jean-Guy Dagenais, Quebec.


Senator Frum: Linda Frum, Ontario.

Senator Stewart Olsen: Carolyn Stewart Olsen, New Brunswick.

Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.


Senator Verner: Josée Verner, Quebec.


Senator Wallin: Pamela Wallin, Saskatchewan.

The Chair: And of course, Governor and Deputy Governor, we’re ably assisted by our clerk and the analysts who help us.

We’re very pleased to welcome back Stephen S. Poloz, Governor of the Bank of Canada, along with the Senior Deputy Governor, Carolyn A. Wilkins. Our last meeting with you occurred last October regarding your fall Monetary Policy Report. We’re pleased to have you with us today to bring us up to date on your Monetary Policy Report for April 2019, which was released a week ago.

Without further ado, I would ask you to offer what comments you might have, governor, which will be followed by questions from senators.

Stephen S. Poloz, Governor, Bank of Canada: Thank you and good afternoon, chair and committee members. Once again, Senior Deputy Governor Wilkins and I are pleased to be with you to talk about the bank’s Monetary Policy Report, which we published just last week.


In our last testimony, six months ago, we found that things were going very well. The Canadian economy was doing well and, in general, was back on the right track, in that it was at nearly full capacity and inflation was near our target. At the same time, we were monitoring the risks associated with protectionist trade measures and high levels of household debt.

Unfortunately, two negative events have occurred since then. Those events caused the economy to take a detour and have delayed it getting back on the right track. Our forecast is based on the principle that their impact will be temporary. Once the economy has adjusted, growth will resume. Consequently, in our report, we have lowered our growth forecast for this year. We feel that it will be about 1.2 per cent in 2019 and about 2 per cent in 2020 and 2021.


Let me give you some details. First, the global economy slowed toward the end of last year. To be clear, some slowing was expected as the stimulative impact of U.S. fiscal measures faded, but the slowdown has been deeper than most forecasters projected and has persisted into 2019.

A major factor behind this global slowdown has been the U.S.-led trade war. This is delaying business investment decisions in many countries around the world. Uncertainty about future trade policies has risen. Here in Canada, doubts about the ratification of the Canada-United States-Mexico Agreement have increased, and these remain a downside risk to our outlook for investment.

It’s certain that an escalation of trade conflicts would be a blow to the global economy. However, the global economy could receive a significant lift if there were progress in resolving these conflicts. I should emphasize that businesses and economies will ultimately adjust to the heightened level of uncertainty around trade by adjusting their investment plans lower. Once those adjustments are complete, however, economic growth can pick up again.

The other major development since October was another sharp decline in oil prices late in 2018, which put Canada’s oil sector under considerable stress. More recently, oil prices have firmed, including the prices that our Western producers receive.

But transportation constraints on future growth remain a significant source of drag and uncertainty. This has led to another downward revision to investment intentions in the sector. Some of this downgrade is likely more structural than cyclical in nature, as it represents the continued adjustment of the sector to global oil prices of $50 to $60 per barrel, rather than the much higher prices of five years ago. This adjustment process is also being reflected in wages and other costs, and in developments in the housing market in Alberta.

It is important to note that as investments in the oil patch are pared back, Canada’s growth slows. But when those investment levels stop falling, Canada’s growth will pick up again, even if oil sector investment does not, because other areas of growth will come to dominate the data. We saw exactly the same dynamic following the oil price shock of 2014-15.

In addition to concerns about global trade and oil prices, we continue to watch how the Canadian housing market is adjusting to a combination of factors: provincial and municipal housing policy measures, the revised guidelines for mortgage lending and, of course, past increases in interest rates. The adjustment of the housing market is particularly important given the context of elevated levels of household debt.

Our analysis has been complicated by activity in some previously frothy markets, the Greater Toronto and Vancouver areas in particular. Research by bank staff shows that the sharp rise in housing resales above fundamental levels in Ontario and British Columbia, and then the subsequent fall, correlates strongly with house price expectations. This suggests that provincial and municipal housing policy measures have had a much stronger impact on housing activity than changes to mortgage lending guidelines and past increases in interest rates.


This analysis is supported by the fact that activity is solid in many other markets in the country. Those markets have the same mortgage rules and the same interest rates. That is what we see in a growing economy with a growing population and a strong job market. Consequently, as the situation stabilizes in Toronto and Vancouver, the overall Canadian housing sector should grow again later this year.


Finally, I would note that the federal government and several provinces have made fiscal announcements during budget season. Our analysis suggests that the combined impact of adjusted spending plans announced to date would lead to a downward revision for our growth outlook of about 0.2 percentage points in 2020.

In sum, the Canadian economy is currently facing some headwinds, but there is good reason to believe that the economy will accelerate in the second half of this year. In this context, the bank’s governing council judges that an accommodative policy interest rate continues to be warranted. We will continue to evaluate the appropriate degree of monetary policy accommodation as new data arrive. In particular, we are monitoring developments in household spending, oil markets and global trade policy to gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.

Finally, let me mention that, since our last appearance, we put into circulation our new $10 banknote featuring Canadian civil rights icon Viola Desmond on the front and the Canadian Museum for Human Rights on the back. I was delighted to learn that this note was just named the 2018 Banknote of the Year, the best new banknote in the world in 2018, by the International Bank Note Society.

With that, Senior Deputy Governor Wilkins and I will be happy to take your questions.

The Chair: Thank you, governor. We will go right now to a list of questions, starting with the deputy chair.

Senator Stewart Olsen: Thank you for being here. I remember when you were here last year and pretty much said the same thing, but when I read your economic forecast, it doesn’t look good. It just does not look good. I hear you saying because oil production — we’re not getting the prices there — but we have other areas of growth that will bring us back up economically. Then you say that we have an economy that is looking to accelerate this year. Can you tell me what you’re basing that on?

Mr. Poloz: I’ll speak briefly to this, and I think Ms. Wilkins would like to follow up.

There’s an important concept at work here, and that is that the shocks we have identified, both domestically and internationally, are shocks that we believe are affecting the level of economic activity, for example, the level of investment. When you have uncertainty about future trade arrangements and your business depends upon the free movement of your product, you may be subjected to tariffs or whatever — you’re not sure — you may then decide now is not the time to expand your operation. So you delay an investment or just don’t do the investment. But that’s the level of investment that goes down.

The other example would be in the oil sector. We know we cut investment by about 50 per cent in the wake of the big oil decline of 2014-15, and companies tell us that, given the developments over the last six months, they’re looking at plans of about 20 per cent lower than that again this year. When those investment levels go down by that much, that’s the level of investment that goes down, and it pulls our measured growth down during that transition phase. Once we stop cutting investment, when we go back to what we call our new normal level of investment, then the trend growth rate that’s there is restored. That comes from population growth, job growth, the service sector — all those things can still continue to grow, but those big numbers are pulled down by those transitory phenomena. Most of the shocks we’ve identified are of that sort.

I’ve given you domestic examples. The global situation is critical, because 47 countries have experienced exactly the same slowdown with very similar characteristics.

I will turn it over to Ms. Wilkins.

Carolyn A. Wilkins, Senior Deputy Governor, Bank of Canada: Part of our assessment about the pickup in Canada relies upon domestic factors in housing markets and obviously adjustments going on in the oil sector.

But it also depends upon global growth stabilizing and picking up in some areas. We do the same kind of analysis when we look globally. One of the common factors affecting all the countries is the one the governor mentioned, which is the uncertainty and an adjustment to a lower level of business investment that seems commensurate with the amount of uncertainty out there. Even the direct effects of trade are affecting the level of exports to a new level that is commensurate with the tariffs. As that stabilizes, we will see the sources of strength come to dominate.

But there are also other factors aside from trade that give us a certain amount of confidence that the global economy will stay firm and grow at a lower rate but one that’s commensurate with what sustainable growth is, which is around 3.25 per cent overall. One of them is just related to how financial conditions have adjusted over the last few months. They’ve become a lot more accommodative, partly because of central bank actions, such as in China — the monetary and fiscal accommodation they’ve done, which will support their economy. We’ve seen the pickup already in growth there, and we expect that economy to continue to grow at a fairly healthy pace.

But other central banks, as well, including ours, have indicated to markets — at least they’ve taken it that way — a more accommodative stance than they had thought we had in January. You’ve seen bond yields come down, not only in Canada but globally. The governor talked about mortgage rates being 60 basis points lower than at the beginning of the year here. That’s been a common factor, too.

Put together, that leads to the forecast we have. There are always risks to every forecast, on both sides, and we understand that. That’s why we’ve said we’re data-dependent. We will be watching the data very carefully.

Senator Stewart Olsen: Thank you for that.

This is a process question I’m really not sure of. As you see this data, do you advise the government of actions that, for instance, China has taken to build their economy back up? How is that being addressed? It seems to me we shouldn’t just be sitting down and hoping that good data comes in or that this will turn around.

Mr. Poloz: An example would be that we get our best updates on the Chinese economy either in Basel, which is an international meeting of central bankers, or at the IMF meetings we were at two weeks ago. The Minister of Finance was there with me and his folks, as Ms. Wilkins is in the room as well. We all hear these updates together. They’re very well monitored by financial markets. It’s not as though we need to keep each other apprised of those international developments.

What we have to bear in mind is that the economy has a certain amount of underlying momentum, and it had a lot. If we go back to 2017-18, we were as good as home. We were at full employment. Unemployment was at a 40-year low. Growth was running at potential, and inflation was on target. The only thing that looked a little odd was that interest rates were lower than usual for those conditions. So we were in the process of gradually and tentatively normalizing interest rates. This was pretty common around the world, with a lot of countries seeing similar conditions from different starting points.

Then we asked, what happened? Well, when 47 countries all do it at the same time, it needs to be a common factor. There really is only one common factor that one can point to, and that’s the trade war that the United States has initiated. That’s not just with China. Those tariffs have gone on steel and aluminum on all of their trading partners. What happens in response is that there are retaliatory measures, which affect a much broader swath of goods from the United States.

We all know that trade wars, in the end, reduce consumer spending power and slow economies, it is hoped, to the benefit of improving conditions for one or another business in the home country. It never really turns out that way. But that is what is slowing the world economy. It’s not the trade actions themselves. We’ve done those mechanics. They’re in our forecast. It’s the sentiment of businesspeople globally who rely on certainty in the system to put their hard-earned money on the line to grow their business and that sentiment has fallen back.

Senator Stewart Olsen: Thank you for that.

Senator Wallin: Thank you. I have two questions. The day after the budget, David Rosenberg, an economist most people know, said the following:

So the Bank of Canada wants Canadians to go on a debt diet and rebalance the economy away from housing/consumption to investment/exports. Yet the federal budget went in the opposite direction!

Do you agree or disagree, and can you comment either way?

Mr. Poloz: David Rosenberg and I agree on many things, but I guess this isn’t really the case.

The big picture is that the economy, post-global financial crisis, has relied on a steady diet of growing consumer debt in order to offset the shocks that we were weathering. I’ve talked in this forum before about how a government could have instead perhaps done a lot of fiscal action and accumulated public sector debt. Some economies did more of this; others did less. In Canada, we did fiscal debt in 2008, 2009-10 and then began to fiscally consolidate. Low interest rates then led to growing consumer debt and the housing sector did most of the growing to offset the foreign shocks that were affecting our economy. That means we haven’t accumulated debt.

What we expect is that the economy goes back to full balance, yes. That the export sector becomes a bigger share of growth. Investment goes with that, because if your company is at capacity from higher exports then you’re ready to grow your company. Of course, as we normalize, interest rates go a little higher, and they are already higher than the lows they were at. As those interest rates go to a higher level, then housing tends to slow down as a share of economic growth. That’s what we call a rebalancing of the economy back to normal.

As for what this year’s budget did, it was a pretty neutral budget. It had lots of actions in it, but macro-economically it did not really affect our forecast.

Senator Wallin: Thank you. Just a follow up to the earlier question, when you talk about the second half of the year that you’ve downgraded now but you see activity picking back up — if the oil sector growth isn’t there, you’ve said that other sectors will compensate. Can you tell us what other sectors those would be?

Mr. Poloz: Yes. Actually, I gave a speech on this in Iqaluit about four weeks ago. The economy is basically operating in two areas, if you like. About 50 per cent of the economy is growing by over 4 per cent, and actually quite close to 5 per cent. That part of the economy is led by new businesses in IT services. IT services is our fastest-growing export category and employment category. The second big group in there is engineering and other professional services. This too is a very fast-growing category and, of course, as we all know, there are well-paying jobs and employment growth there.

One of the other categories in there is tourism. Tourism is a pretty big category, and, again, services. Interestingly, tourism also includes educational services, which is a very big and growing export category for us. When a foreign student comes to Canada, they pay tuition and spend four years and spend all kinds of other money on accommodations and those are counted as tourist receipts because the cheque comes from outside of Canada. Financial services is another huge category. Health care is the last one I should mention. These are the big service categories that are driving forward.

The other half of the economy, more or less, is growing more slowly. We’ve talked about the oil sector, but manufacturing in general is bearing the brunt of the trade uncertainty and the uncertainty is feeding through the investment side from those businesses.

In between, we have some categories that are kind of in the middle such as agri-food, which is doing fine except for a couple of trade issues. It is also a high-growth potential area.

All that to say that there are a range of experiences, so there are a lot of things there that aren’t being touched by the shocks that we’ve discussed and are actually growing quite well. We can see the evidence of that in the labour market. The labour market is performing extremely well. This, by the way, is what we see in a lot of other countries that have also slowed. It is the manufacturing sector which has taken the brunt of the trade war, and the other 80 per cent of the economy, which is services in almost all major economies, are growing well and creating a lot of new employment.

That’s how you can have 80 per cent of the economy growing fine and you have a slowdown in one part and it drags down the aggregate number. When that slowdown stops, say when the investment gets cut and the cuts finished, then the other 80 per cent shows as the leader again. That’s the core of our story.

Senator C. Deacon: Thank you, Governor and Deputy Governor for being here again and also for the effort you’ve put into explaining things in plain language. It helps the rest of us who don’t live in your world.

Focusing on the investment side of things and the productivity gains that we do or do not get in Canada as a result of investments that are made, I think Dominic Barton said it first in 2014 when he said that Canada is really good at turning money into ideas but not as good at turning ideas into money. That captures a crucial issue very effectively, and it’s one I’m quite passionate about.

The extent to which you’re seeing evidence in — you talked about the fastest growing sector being IT services. I’m thinking that may be software-as-a-service companies and others.

So the extent to which you’re seeing investments in the mobilization of knowledge that are showing some really good success in global competitiveness as being quite helpful in balancing off some of our lagging sectors, can you just speak to that a bit? Because I think for me it’s just one of those things we have to start to really understand how good we’re getting at it, and how much better we can get, and what other aspects of the economy can be affected by it positively.

Mr. Poloz: Sure. Just as a preamble — and I’ll turn to Ms. Wilkins — I think the whole answer I just gave to Senator Wallin gives you a sense of how you could have a variety of experiences, right? Some areas could be absolutely busting the doors out, you know, and it may not show up in the data we commonly summarize and are summarized in Dominic’s quote. So that’s an important thing to bear in mind as we see these positive stories. But why don’t you talk a bit about —

Senator C. Deacon: So it’s disaggregated bright lights that I’m looking for.

Ms. Wilkins: It’s interesting. You want disaggregated bright lights. I understand that. Clearly, those industries that are adopting the technology quickly are going to show those bright lights.

When you look at Canada in general and why its productivity has lagged, say the U.S., part of the explanation is always we don’t have as much scale as others. But when you dig deeper, it’s actually the gains that you can get from new technologies and those bright lights are diffused everywhere across the industrial spectrum.

So what seems to drag Canada back, or hold Canada back from having as many gains from the new technology as other countries, tends to be that companies, for one reason or another, don’t tend to adopt the new technology as much as in other countries. There are many reasons given for that, but that’s really where it’s at.

So when we look at our forecast, in fact, our outlook for productivity growth is actually quite modest.

Senator C. Deacon: Yes.

Ms. Wilkins: I’m looking at the number, and it’s kind of in the 1 per cent going down to 0.8, and we’ve actually revised that down. Part of that is because of the investment profile being revised down, but part of it is because our trends have not been as strong as in other countries.

So while we may end up with the same potential output growth, more or less, a little bit slower than the U.S., the composition of that potential growth is different. We have lower productivity contributing to that and higher population growth.

So I think that the work that is being done by the public policy forum and others to think about the policies that will allow us to capitalize on the intangibles in the new innovations is really important.

And to close it, if that investment in the innovations are coming a lot from intangibles — and governor you’ve talked about this a lot — we’re going to have to really think about whether or not we’re actually measuring investment in productivity properly.

Senator C. Deacon: You spoke about that in October, yes.

The Chair: Thanks very much.

Senator C. Deacon: One more supplementary question.

The Chair: Second round, if you don’t mind. There’s a long list.

Senator C. Deacon: I don’t mind.

The Chair: Second round would be great. Senator Frum, followed by Senator Marshall.

Senator Frum: Governor, the new CUSMA has yet to be ratified by the three countries involved. Do you believe there is still an insecurity factor in investment decisions by enterprises regarding the possibility of the treaty not being ratified? Is that what you’re referring to on page 18 of your report when you say, “trade uncertainty is assumed to reduce the level of business investment by 2.5 per cent by the end of 2021”?

Mr. Poloz: Yes, it is. That is exactly what we have in mind. We dealt with this uncertainty ever since the Trump administration came to power. It was immediate that people wondered what would be the future of NAFTA.

So we had growing discrepancy between what our models were expecting for investment in Canada, especially given how tight things actually were, because exports had grown to the point where we were operating at full capacity in a lot of manufacturing businesses. So there was a growing discrepancy between those two things, the actual investment and the forecast investment. So we began to include that in our forecast, and then we thought that surely when we get a renegotiation of NAFTA, that would kind of turn things back on. As you know, the sense of relief around corporate Canada was palpable when a deal was reached.

But it was at about that time that there were many pre-budget consultations going on, and one of the ideas that was floating around was that we might have an accelerated capital consumption allowance to kind of match how things were being done in the United States. So to try to level the playing field a bit on the corporate tax side. And so my sense is that in the latter part of 2018, people were kind of waiting to see if that occurred, and of course it did. So that kind of turned the lights green for 2019.

But then, of course, what has happened next is we’re back on the uncertainty watch again because of the ratification issue. So there’s a little bit of a tug of war going on there.

We know, of course, that many companies just don’t rely on NAFTA or CUSMA in order to grow their business.

Many of the ones I mentioned before — Senator Wallin gave those service businesses I talked about. They may rely on certain aspects, but not like a traded good does.

So there may be a good recovery and investment. We think there’s going to — we’ve only sketched in a — let’s call it a decent recovery investment. We don’t want to overdo it. We’re hoping we will get surprised on the upside on that. We’re being careful about that until we actually see it.

But of those companies that are affected by the uncertainty around CUSMA directly, they have to decide if they want to go ahead cautiously or wait longer until we are clearer on the ratification issue.

We don’t have any data yet in 2019 on investments. We have our own survey, which suggests again that investment intentions are quite high, and so we’re expecting to see the fruit of that, but the question is actually when. So we have to wait and see some data to confirm our hypothesis here.

And of course the aggregate numbers will continue to be way down by the cutbacks in investment in the energy sector. So we have to kind of filter that out and then look at what the rest are doing.

So for the trade data — normally the trade data give us clues, because if you’re importing machinery and equipment you can see it there. So far they haven’t really given us much of a read. We only have two months of data. So far not much to report on that that’s really that new.

The Chair: Thank you, Senator Frum. Senator Marshall will be followed by Senator Day.

Senator Marshall: Thank you, very much, Mr. Chair. Thank you for being here today.

I wanted to talk about a very narrow area, and that’s the interest rates. We all wait to hear what your announcement is going to be, and everybody is predicting whether rates will stay the same or go up.

There is so much in the news media now about rates. They say for consumer debt 46 per cent of Canadians are on the brink of bankruptcy or insolvency, and of course corporate debt they say is increasing and get riskier. Of course, the government is addicted to debt because they are now up over $1 trillion if you look at the Crown corporations.

Do you see interest rates going up? How can rates go up in the foreseeable future? I just can’t see it happening. Could you speak to that?

I feel we’re stuck between a rock and a hard place. That if rates go up even a little bit there is going to be a lot of damage to the economy. It’s going to affect the government’s bottom line. Just speak to that a little bit. I know you say interest rates are data dependent, but the data I’m looking at is all the debt.

Mr. Poloz: So we would begin this analysis from what the level of interest rates are relative to their normal ranges. So right now, our rate of interest at 1.75 is below the rate of inflation. So inflation, just in turn, you know, it’s a negative rate of interest.

It is hard to believe that the economy would settle in a place where it’s growing at potential and inflation is on target, we have unemployment at a 40-year low and that we would need a negative real rate of interest in order to sustain that.

Now, we know — based on what we have done and what we said in our latest interest rate announcement — that is, in fact, what we have concluded. Today, for what we see, we need this level of interest rates to sustain us and project that recovery that we have talked about.

That means there is something out there — we call it a headwind — that is pushing us back and the low interest rates are kind of counteracting that and keeping us in a place where unemployment is at a 40-year low.

What we need to see is that those headwinds dissipate. If those headwinds dissipate, then interest rates would rise. We put out there this neutral rate, which is our best thinking around where it would naturally go to. Because we don’t want people to think that they would keep rising and rising. We put that in our statement a few months ago to help people manage that expectation that if interest rates are normalizing, there is a range of 2.25 to 3.25 per cent, which seems like the average place where interest rates would go, or 1.75 now. We’re not far from the bottom end of that range. There are many reasons why that range is uncertain, so we don’t put it as a carved in stone thing.

So that’s our background, and I agree that you managed to follow up on the indebtedness side. We think the economy is more sensitive to interest rates today than it ever has been because of the debt that you have described, so that affects that analysis. It may represent the most important headwind, but that’s why we say “data dependent.” Do you want to follow up on that?

Ms. Wilkins: Just one thing on the household debt, which I think is really important. We have said that it’s one of our biggest domestic vulnerabilities. It makes us vulnerable to a downturn. You have to be really interested in where did all this debt come from?

The starting point is that 30 per cent of people, households, don’t have any debt. For those that do, some of them are pretty highly indebted. We look not only the average debt levels but the distribution, who really has a lot of debt? About 16 per cent of people have a debt-to-income ratio that is greater than 450 per cent, so that’s a lot. When we look at where that came from and where the rising debt service ratios are go along with that debt come from, a little bit of it is increases in interest rates. But a lot of it is house prices. It is concentrated in Toronto and the greater Vancouver area.

So when we look at the issues out there, a bigger one for households is really the size of the mortgage that one needs to take on given where house prices are. The adjustments that we’re seeing in housing markets, which are dealing with that to some extent, and the policies that have been put in place to put some guard rails around new debt, like the underwriting rules, are difficult for a lot of people, but they are also contributing to the sustainability of the Canadian economy and the growth that we hope to see.

Senator Marshall: I have one last quick question. When you look at the debt, say the consumer debt, and you’re saying your interest rates are data dependent, do you take a look or assess what impact it would have on housing? If the interest rates go up, and people can’t pay their mortgages, how is that going to ripple through the housing sector? Is that part of the data? How far does your data go out?

Ms. Wilkins: We have a couple of directions that we try to take that. So we have one macroeconomic model that is highly theoretical that tries to model different kinds of borrowers. You know that will be imperfect. It’s all theoretical. So we have individual data that is anonymized where we can do experiments. We can say, “Okay, for those who had a five-year mortgage in 2014, what is it going to look like for them when they renew?” We do that for different vintages of mortgages.

In fact, that’s why when you look at relative to last year, when we thought households would be facing much higher mortgage rates potentially, today we see the mortgage rates have declined 60 basis points. There may be an increase for some, but not as big as we thought. It is quite important to calibrate that. It’s real people on the ground that bear the cost.

Senator Marshall: The rates go down, they can assume more debt.

Ms. Wilkins: I have to say that we do pay attention to that closely. We also look at bankruptcy rates, rates of arrears, just to see signs of stress.

Senator Marshall: Yes, thank you.

Senator Day: Governor, Deputy Governor, thank you for being here in this wonderful, temporary Senate building. We’ll give you a tour later on, but I wonder if you could expand on this statement you gave us at the beginning when you talked about the housing market, and your monitoring the adjustments in the housing market.

This suggests that provincial and municipal housing policy measures have had a much stronger impact on housing activity than changes to mortgage lending guidelines and past interest rate increases.

In Atlantic Canada, I have the sense that the stress test being applied to young, first-time home buyers or younger people who wish to move up in the housing market, are having a lot of difficulty because they are losing out on the ability of dealing with somebody locally who knows the resiliency and the non-economic factors that are involved, the family support, and those things, because their employment slip is being sent to Toronto, and run through a program and they are being rejected outright and the lender locally is saying, “I can’t help you.”

I was hoping that you would say that the mortgage adjustment, the stress test that has been in place now for a short couple of years, is something that we should see be reduced. But your comment seems to suggest there are other factors that are more important to look at, and that discourages me and all the people who come to me talking about the difficulties they have.

Mr. Poloz: I understand, senator. So there are at least three different stories operating in the housing market. One is that we have housing markets in Alberta, and to a lesser extent in, Saskatchewan, still adjusting to this regime of lower oil prices, so there is a structural adjustment going on there. The way this is expressed would be lower job growth or some migration away and then a depressing effect on house prices. So those housing markets are operating slowly.

The second story is the story of basically Toronto and Vancouver where we had a gigantic run-up in sales, price wars, bidding wars, double-digit increases in prices, et cetera. So that’s when it went up and then we had a bunch of policy changes, and now it’s come down, and we’re watching that closely to see when they stabilize out.

The third story is what we call normal land where housing markets are driven by employment growth, continued pretty low level of interest rates, but good jobs growth. And, of course, they are being affected as well by these policy changes. So the situation you’re describing is quite typical. It’s in what I call the normal markets.

So we know from microanalysis that, if we go back to 2017, we analyze the micro-data and we knew that something like 25 per cent of those who qualify for mortgages that year would not qualify for the same mortgage when the new rules went in place, which is a sizable group of people. But at the time, what we were concerned about was exactly the former question, the rising level of debt, and will people be able to manage these debts and a regime where interest rates are more normal, as opposed to being, at the time, 0.5 per cent?

We all knew that those could not be permanent. We would not have sustained 0.5 per cent interest rates from the Bank of Canada. That’s literally not possible. So we needed people to be more prepared for that. If you look at the micro-data, what you find is people buy a house and borrow to the extent that they can. They buy what they can afford.

We were giving speeches quite regularly, and saying to people this is a looming problem. I shouldn’t have to convince you to put on a life jacket if you’re going out in a canoe. That’s just normal practice. The same thing for a mortgage. You should stress test yourself. How would that look if rates were 100 or 200 basis points higher when it’s time to renew? It didn’t really have any effect on any of the numbers that we could tell.

We’ve got these three housing markets, and we only have a policy that affects everybody the same way, but frankly, interest rates affect everyone the same way. That unsustainability and the risk of financial instability, if there’s a shock to the economy — let’s say all of a sudden the world economy picks up speed and interest rates just go up — it won’t matter.

As you can see, we didn’t lower interest rates in the last six months, but mortgage rates are down 60 basis points in Canada. The reverse can happen just as easily. Mortgage rates can go up 60 or 100 basis points in Canada without us moving our rate. Those people who are renewing their mortgages will have to pay for that. If they have borrowed so they can really only afford the interest rate today, then what will happen? What we will have is a big magnification of those shocks in the Canadian economy, people losing their homes and so on.

Those are put there to cushion the economy from those possibilities. That’s the intent.

What we’re watching is how people are responding. If there are 25 per cent of people who would not have qualified for a mortgage, they have more than one way of responding. One is they’ll just say, “Okay. I’m priced out.” What they’re really saying is, “I still want a house some day, so I will keep saving and maybe it will be a year or two from now.” If they’re in a normal market, houses aren’t really going up fast in price. They can still make a plan.

The second way is people are saying, “I can afford a smaller house. I can’t afford that beauty I have my eye on. I can afford something smaller or something located in a less expensive neighbourhood.” People are adjusting that way.

What we can see is that people are not stopping. They’re adapting to the rules, and those rules are achieving their purpose. So the quality of debt that’s being issued has improved quite a lot.

I go back to the earlier question. The debt as a share of income went up so much not because each individual was adding to their debt load, but because new people who were entering the indebted group were taking on very high levels of debt in order to buy a house. That’s part of that affordability phenomenon and fear of missing out. If the price of houses is going up by 10 or 15 per cent, you will be priced out of the market for that reason, not because of the stress test.

The other thing that has happened is that has rolled over and those pressures are gone, so you have a more normal functioning housing market. That is beneficial to people who are trying to make a life plan.

All that to say, obviously, it’s a very complicated answer. There’s a lot going on in your question. I think that once people digest this and make their new plan, we’re going to see a return to growth in the housing market in the second half of this year.

Senator Day: The stress test that’s being applied right now is 200 basis points in addition to whatever the interest rate is on the proposed mortgage. Do you see a reduction or elimination of that stress test? Has it achieved its purpose?

Mr. Poloz: It’s really not our stress test. We’re part of the group that advises the minister and OSFI on these things.

I think it was designed for the situation we’re in. Everybody’s open to watching it and seeing how it should evolve through time, but for the moment, we still have very low interest rates.

In other countries they’ve taken much bigger stress tests in order to guard against the risks that we’re talking about. Basel will be able to collect international experience across these policies.

Macroprudential policy is the new tool. We needed that new tool because interest rates had to be low for so long, they were creating side effects like these. They were, obviously, beyond the central bank’s responsibility to control. If we tried to control debt with our interest rate, we would have to cause a recession to slow down debt. That would, of course, mean we wouldn’t achieve our inflation target. So we can’t do all those things with one tool.

Senator Day: Or the employment.

Mr. Poloz: Or the employment.

The Chair: Senator Day, you thought that was a straightforward question.


Senator Bellemare: First, I have a question for Mr. Poloz and then another for Ms. Wilkins. I will begin with the first, regarding the risks associated with inflation. Your economic growth forecasts are quite pessimistic for 2019. In your report, you refer to inflation around the target, or 2 per cent, but it is a bit below the target for the first quarter, at 1.7 per cent.

I would like to hear your comments on the risks associated with the outlook for inflation. At first glance, it would seem that there are risks in which inflation would be better controlled than at a level of 2 per cent or that it might even be lower. I would like to hear more from you on the risks associated with inflation.

Mr. Poloz: When these risks are mentioned at the end of the report, the risks are often related to the growth rate. They are economic risks, but it is because of our paradigm. It is simply that these growth rates are relative to the potential growth rate that influences inflation rates in two years. Our forecasts are prepared with an outlook of about six to eight quarters. If there is a risk of lower economic growth, meaning if there is a risk for the growth rate, that will eventually impact inflation.

Senator Bellemare: You look at the issue in that perspective.

Mr. Poloz: Exactly. It is a chain of reasoning.

Senator Bellemare: It has nothing to do with the dynamic of inflation as such.

Mr. Poloz: It is not at all immediate inflation, but rather the outlook.

Senator Bellemare: You told us last November that you were undertaking studies to begin looking at your agreement with the government. Could you explain a bit where you are in your studies of the agreement between the Bank of Canada and the government regarding updated inflation targets?

Ms. Wilkins: Our research, which allows us to develop our agreement with the government, which will be renewed, includes three parts. The first is related to the monetary policy framework that must be followed. What is best? For more than 25 years, the inflation target has been 2 per cent. The framework changed a bit here and there, but it has been relatively the same for a long time. We find that it has been successful, but we know that the framework contains a few small weaknesses and we want to see if there is another that would be better.

We have therefore prepared a research plan that allows us to look at several frameworks that exist in literature or that are options. One such option is a double mandate framework in which we would not only target the rate of inflation, but full employment. There are several others. Our approach would be to model those frameworks and evaluate them based on well-established criteria to better compare apples to apples, not oranges.

The second part is related to the tools available to us. As you know, we normally use the key interest rate. We raise it or lower it based on our outlooks and our objectives. But we know that, with a neutral rate that is not very high, the likelihood of needing another tool would be higher than before. We will better understand the other tools available and that are used by other central banks, such as quantitative easing and negative nominal interest rates, among others.

The third part aims to help us better understand how macroeconomic policies work together. We are very aware that fiscal policy, monetary policy and macroprudential policies — such as the B20 policies we have just discussed — work together. These policies could work well to help us meet our objectives, not only regarding inflation, but also regarding the Canadian economy. On the flip side, they could work against each other. That is a part of our study that we are carrying out with our partners. With all our research programs, we talk not only with academics, but also with people who are part of the fabric of Canada, such as businesses and representatives of society. We will not only discuss our methods, but also our findings.

Senator Bellemare: You will need to have discussions, I imagine.

Ms. Wilkins: There is quite the discussion. There are very different points of view, but we expect to advance our programs this year and next year. We are working very closely with the Department of Finance, obviously, and we will be presenting our recommendations to the governor and the Minister of Finance at some time in 2021.


Senator Duncan: Thank you for your presentation. I’m going to thank in advance my colleagues for their patience with my question, because this might be a little in the weeds. I appreciate, as Senator Deacon mentioned, your frank and common language.

My query is about the impact in the financial economic forecasting of the current state of Canada’s natural environment. We’re seeing changes in our natural environment. We’re seeing the impacts of climate change. I noted you dealt with carbon tax pricing, but today at our front door we’re seeing the impacts of climate change.

I realize this is immediate and that Ms. Wilkins mentioned monitoring over time, but this isn’t Canada’s first rodeo when it comes to dealing with this sort of impact of climate change. I note the fires in Alberta and British Columbia in recent years.

There’s a tremendous impact on our economy, something bad. There’s some good that comes out of it — in the sense of, for example, our rebuilding and use of our natural resources. The lumber demand is tremendous.

I recently read an article about the tremendous need for skilled labour in the electrical transmission field, a forecast of thousands of workers needed. Speaking with one of those skilled workers, he mentioned to me that many of his colleagues have gone to California to deal with the rebuilding of the electrical transmission lines there.

Again, while it’s immediate news here in Ottawa, and it wouldn’t show up in these documents — perhaps you’ve addressed it elsewhere and I’ve missed it — I’m wondering about the data and how we work that into our economic forecast. You mentioned you advise people to put on a life jacket when there are economic headwinds coming. Where do these sorts of climate change impacts factor into the economic forecasting?

Mr. Poloz: This is an emerging area for central banks. I’m going to turn it over to Ms. Wilkins, and not because it’s a hard question.

Senator Duncan: Because you’re duck and run?

Senator Day: She’s the emerging expert.

Mr. Poloz: Because she’s spearheading our institutional approach on this. You will see more on it in our Financial System Review, the FSR, which will be published May 16.

At the first layer, it presents itself as a financial stability risk through the insurance system or through the potential for stranded assets on lenders’ balance sheets, that sort of thing. Positioning for more transparency and getting those things factored into the analysis is kind of step one.

In the broader perspective, we’ve joined up with some other central banks. Why don’t you give a few highlights on that?

Ms. Wilkins: Sure. It’s interesting, because the climate change set of issues is broad and touches everybody, so it’s very important. The goal for us is to see how can we, as a central bank, given our mandate, contribute to the substantive debate or discussions that are going on about that?

From our point of view, a couple of areas are quite related to our mandate in terms of monitoring the financial system that would benefit from our doing some work and also working with others who are doing that.

The two areas we see as being very important and relevant for us are related to the physical risks. Those physical risks are terrible for individuals. We see it, like you said, out the door.

They also have implications for insurance companies that are insuring against those. Given the increased frequency, the different nature of these kinds of risks as they materialize, the question we would ask is this: What implications will that have for the companies that are affected? Of course, that would be something that OSFI would be interested in as well, so we’re not the only one.

The second bucket is a little bigger. It’s really how the economy transitions to a less carbon-intensive economy. That changes the kinds of workers we might need, it changes the sectors that are receiving a lot of investment, and it changes the relative value even between countries that have different comparative advantages in a new type of climate.

So that’s a very broad area. The governor mentioned stranded assets. We even see today that investment companies and banks are looking at their climate-related investment plans in their exposures. There’s very little data about it.

So the networks’ goals are to have a taxonomy where we’re all talking about the same thing, that we improve the data we’re using, and that we integrate the climate-related risks into all the financial stability analyses and financial analyses we’re doing.

The last thing I’d like to say is that clearly we participate in markets. We have a building that uses energy, so there’s a citizenship part there that central banks, including the Bank of Canada, are looking at as well. Our new building uses 50 per cent less energy than the old one. That wasn’t by accident; that was by design. We’re looking at our activities in that light and participating with central banks in that same area as well.

Senator Klyne: Welcome and thank you to our panel. My question is in the context of global trade tensions and your real GDP forecasts. In the realm of trade tensions, we have a number of things playing out there right now which are probably causing some people to want to run home, pull the sheets over their heads and hope it all goes away. We’ve got the drama that played out through the NAFTA renewal; CUSMA yet to be ratified; the whole Brexit negotiations that linger on in, I guess, negotiations; the relatively recent China tariffs on pulse crops and now uncertainties around canola; all laying over top of an already-soft oil and gas industry in Western Canada. Then there’s the much-anticipated discussion or thought around China and the U.S. reaching some type of a broad agreement if and when.

With those items, are you counting on certain things being resolved in reaching agreement in your GDP forecast? If China and the U.S. reach a broad agreement and if CUSMA gets ratified and if China and Canada resolve their differences, does that over-adjust or put further upward pressure to create an inflation scenario?

Mr. Poloz: I could just say yes to all of the things you said and you can guess which ones because that’s a complicated layout. To be clear, here’s what we have done.

First of all, there are actual tariffs in place — I mentioned them earlier — on steel and aluminum. Then there are some additional bump-ups in U.S. tariffs that are planned unless they’re officially stopped or postponed. They were postponed once but they were moved to later this year. Those are in our forecast.

As I’ve tried to emphasize before, the tariffs themselves, the models we have at trade — what happens is somehow things adjust to them. The consumer ends up paying. You’ve seen our recent study where the cost of a washer and dryer in the United States has gone up by such and such. It’s costing consumers this many billions of dollars and it means some huge number per job hopefully saved. It’s a very counterproductive type of policy. It’s not beneficial to anybody.

In any case, we’re left with building in those things and accepting them for what they are. Then you have the countermeasures which are even more complicated because they’re on a much wider range of things. If we’re putting a countermeasure against the steel and aluminum tariffs, then to collect roughly the same amount of money and to make it add up, we need to put countermeasures on a wider range of products from the United States. Of course, those are strategically chosen. It’s all part and parcel of a typical trade dispute.

We do our best to manage all of those things. They don’t have large macroeconomic effects on our models. Take, for example, restrictions on canola imports to China. Those are big. That’s 1 per cent of our exports. It’s a pretty big number just for that one category. So you have restrictions on those but China will probably still buy roughly that much canola. They will buy it from somewhere else.

So there’s a global market and, when things settle out, we should be able to find another place to sell the canola. Of course, it’s a waste of energy to do all of that but, the fact is, this is how things kind of end up happening. Things get distorted but you do not get not major declines.

The big impact comes from the part I talked about, the softer part which is harder to analyze. How does a businessperson react to that threatening environment? Is it the right time for you to invest big in your business in order to expand it? The answer is probably no. Then we get a uniform pullback in investment around the world for this very reason.

People want to know the future of the rules they will be dealing with before they risk so many extra millions of dollars. It’s not like a mechanical thing; it’s people who decide this stuff.

We watched that slowdown everywhere. Of course, the good news is that it’s based on sentiment. It’s not a long, grinding process. It’s immediate. You read about it in the newspaper. You’re on a board and the board says we’re not approving that project until that’s cleared up. The CEO would still like to try it but it’s not the CEO’s job to risk all that money. So things stop. That just means, though, if there is a resolution, things can turn around pretty quickly because, again, it’s just sentiment. “Oh, the lights are back on and we’re back in business.” Of course, it is possible the front may shift because there’s a threat of major tariffs on European automobiles. The Europeans are particularly concerned that the next phase would be theirs as opposed to China’s if there’s a China deal. It leaves all sorts of people wondering what it will be like.

We can’t assume everything will be fine. We do say, well, it’s not the worst-case scenario. The worst-case scenario would be a major escalation and true entrenchment. That would be a case where the world economy would slow quite significantly and, by the way, probably permanently because you would stop investing in new capacity and the trend growth rates of all economies would slow down in a trade-fraught world.

That would also happen in the context in which the prices of many things would be rising because people would be imposing tariffs all over the place. I’ve just described an inflation-risky scenario while the economy is slowing. In the 1970s we had a term for that: stagflation. That’s the sort of risk we would be facing and it is hard to deal with.

That’s the worst-case scenario. The best-case scenario is everything gets signed up; we’ve achieved a great deal and we’re back to normal. That would give everybody some lift because those investment decisions would come back on line. Our forecast is based somewhere in the middle because we have to allow for both sides to occur. That’s just the nature of the game.


Senator Dagenais: I thank our guests. I will touch somewhat on what Senator Klyne said.

When we look at the areas in which the government acts to support certain sectors, there is sometimes reason to be a bit wary. Take, for example, the problems related to pipelines in Canada. The government is buying the Trans Mountain pipeline with no concern for the price. As for NAFTA, it cannot be qualified as a success across the board. The government is subsidizing dairy producers. As for the problem of newspapers that are no longer profitable, the government creates an aid program to support them. We spoke about the canola sector, which also benefits from an aid program. There is also the matter of the duty on aluminum. In short, what impact can all that have on the actual strength of the Canadian economy?

Mr. Poloz: That is an excellent question, but it is very hard to answer. There is distortion and a measure to offset that distortion. However, the distortions remain in the system. The most important question is what the future implications are for the business sector. Must investments be made today for next year? Is the situation temporary? It would be interesting to calculate the short-term implications, but the most important issue is the long term. For now, I imagine it will simply discourage investment and economic growth, as certainty is the most important thing.

It is not really a forecast for you. It is just to consider the uncertainty of forecasts. We analyzed scenarios, as I just mentioned, to consider the situation in the United States, and what will happen if there is or is not a resolution, over how much time, et cetera. There are a lot of possible cases. It is not really possible to make a simple forecast if we take that into consideration.

Senator Dagenais: As well, you refer to inflation of 2 per cent. What portion of that would be attributable to the new carbon tax to be imposed by the current government?

Mr. Poloz: That is a question for Ms. Wilkins.

Ms. Wilkins: No problem. I have the answer because we tried to calculate it. As with any change that has implications for inflation, we try to measure it, given our target. When we look at the direct effects on inflation, it is believed that it could add 0.1 per cent in 2019 and half that in future years, as long as there is an increase. It adds to inflation, but not very much.

Senator Dagenais: Thank you very much.

Senator Verner: Thank you very much, Ms. Wilkins and Mr. Poloz, for being here with us today. I would like to continue in the same vein as my colleague Senator Wallin, when you say in your remarks that, although there are investment difficulties in the oil sector, there are other sources of growth that will become predominant. You listed some, such as IT, tourism and others. In that it is said that much of the financial contribution to equalization is revenue from the oil sector, would say that those other sources of growth will contribute as much to the current equalization formula?

Mr. Poloz: That is also a good question. Each of these sectors will count in the future. For instance, the oil sector will generate about $80 billion.

Senator Verner: But that is a decline.

Mr. Poloz: It is a decline in growth, yes, but in the end, it will still be $80 billion every year. It is our largest export and will be for a long time, I imagine. The service sector accounts for 25 per cent of total exports; that is a lot less than oil exports.

So it is a basis for our economy. When we talk about growth, we look at whether it will grow at a rate of 2 or 3 or 1 per cent. In the end, if there is natural — or “organic” — growth in that sector of about 2 per cent per year, or at least 1 per cent, and if we are able to deliver the oil, we will benefit from that natural growth. With limitations on delivery, that is not possible. During that period, we see less investment. This is a sector that, historically, was important to total investment in the economy. It is a lot less so today, and we have adjusted it since 2015. We must not forget this sector. it is very important and will remain very important.

As a source of growth, among the other sectors that I mentioned, for example, IT has achieved 7 to 8 per cent growth per year for five years. That is excellent. It is a sector that affects all other sectors. Certainly, the oil sector uses a lot of these services to cut its costs, etc. There is an entire economy that is becoming digital. They cannot really be separated, as it affects the entire economy.

Senator Verner: I would like to continue with the issue of the oil transportation sector in the West. We know how much of a problem this file represents. At the very least, it is the subject of many demands, on both sides. I was wondering, if the projects were to proceed or when they proceed — Trans Mountain and Enbridge — , whether they will help partly resolve the problem of oil transportation, particularly if it happens soon. For information purposes, what could the value of a barrel of oil be compared to its current value if these two pipelines were in operation? Do you have any idea of the price of a barrel of oil if these projects were to proceed now?

Mr. Poloz: There are a lot of possibilities. It is possible to see the global price. For example, oil from Newfoundland and Labrador is evaluated based on the Brent price. Depending on the means of transportation, if by rail, that costs about $10 or $12 per barrel. That gives you an idea of the balance between the prices. But if the oil were sent west by pipeline, it would certainly be evaluated at world market prices.

Senator Verner: But you have not yet developed hypothetical scenarios.

Mr. Poloz: We indicated on Line 3, for next year, that that is in addition to the capacity and growth of the sector and, naturally, to revenues, not just for the sector, but also for Canada. In terms of exports, Trans Mountain is rather uncertain for now.

Senator Mockler: There is no doubt in my mind that, whatever I ask, you are the best person to answer it.


Yesterday, I was participating at an event, and the moderator was former Premier McKenna, also the former Ambassador for Canada to the U.S. He said that as he travels the world, people tell him, “Canada is being seen as a country not to put money in.” At the same time, Minister Sohi acknowledged that there is a real lack of pipeline capacity in Canada.

What is the impact of the Bank of Canada’s economic growth projections for the lack of transportation capacity for Canadian crude oil? There is no doubt you follow that. To what extent would additional transportation capacity increase prices for Canadian crude oil, at the same time looking at world markets, as Senator Bellemare just asked you a question about?


Mr. Poloz: We do not have an exact estimate, but I imagine that Ms. Wilkins can answer you.

Ms. Wilkins: You are asking what the increase in growth would be if Canada had more transportation capacity?

Senator Mockler: If we had the capacity to transport from east to west and vice-versa.

Ms. Wilkins: I do not know because we have not done this type of calculation. However, regarding the desire of people to invest in Canada, we hear people talking about the sector and transportation problems. In general, though, when we look at the current figures, we see that direct investment in Canada has risen considerably recently, particularly in the finance sector, which includes insurance and the stock market.

Although it is true that the feeling is not very positive for Canada, investment in Canada is apparently more solid.


Senator Mockler: When I crisscrossed Canada in the last two weeks from coast to coast — and I want to tell you, there is a lot of anger out there and Canada is divided. In my 36 years in public life, I can tell you I have never seen that. Atlantic Canada is thinking one way; Quebec is thinking another way; then there’s Ontario and Western Canada. They say it’s about $100 billion to $150 billion in investment we have lost in that particular sector.

Mr. Poloz: Yes.

Senator Mockler: I cannot imagine that the Bank of Canada has not done an analysis of the impact on our economy.

Mr. Poloz: We, of course, have. What that analysis goes back to is how much investment have we — I think I would resist the term “lost” — but how much has investment been cut back in the past five years? That is a really big number. But it’s not just foreign investors; it’s domestic investors.

Senator Mockler: Absolutely.

Mr. Poloz: It doesn’t matter what product you’re selling, if you think you can get $100 for each one of them, you make your plans around that, and then if something happens almost overnight — which is what happened in late 2014 — and it goes to $30, and people start thinking it will be $50 or $60 because there is so much shale oil available in the United States, they have grown by leaps and bounds. So now every extra barrel we’re able to ship to the United States is actually being exported from the United States. Our growth in exports of oil to the United States is resulting in growth in their net exports out of the United States. It’s like a transit because they are producing so much.

You’re told that’s how your business model has changed, so you determine that you’re going to scale back your plans. International investors recognize that just as much as domestic investors, so investments are being scaled back. But that doesn’t change the fact that when that settles down, and we are gradually adding more rail capacity and we get Line 3 and hopefully we get Trans Mountain, that growth from that level just continues from there. What prices we get, of course, are a little uncertain, but for sure something that goes through a Trans Mountain that’s being sold to the world is not going through the U.S. system and not going on rail, so it’s not paying those extra costs.

I get it that this has been a sequence of bad news, but we shouldn’t lose sight of the fact that we’re still selling on the order of $80 billion worth of product every year, and that is a very important base to our economy, as I was saying before.

The investment, I have heard the same story. I have heard comments like what Mr. McKenna is repeating. I think there is some validity to that. We have had enough uncertainty about projects and how they get done. I have talked about it many times this afternoon. People around the world are hesitating to invest in lots of areas. One of the things that is paramount to them is the sort of political uncertainty that is a common theme. That uncertainty is coming not from one single place. The big story is from Washington, D.C., of course, but there are other places where that uncertainty is important.

So indeed, foreign direct investment, actual investment in Canada rose by 5 per cent last year. Maybe it should have risen 10 per cent, but it rose 5 per cent. It did not go down. I think we are attracting investment in a lot of other areas that are being unmentioned. That can be the only actual reason for that. We’re preoccupied with things, which, of course, we are.

Senator Mockler: Last question?

The Chair: Short and sweet.

Senator Mockler: When President Obama cancelled Keystone, the U.S. in the last three and a half years built pipelines that are equivalent to eight to 10 Keystones and represent 19,000 kilometres of pipeline.

Mr. Poloz: Yes.

Senator Mockler: In Canada, there is zero.

Mr. Poloz: Yes.

Senator Mockler: My question to you, sir, is if I look at Energy East, have you done an analysis on the impact? The equivalent of 19,000 kilometres of pipeline is from three pipelines starting at the Port of Halifax and finishing at the Port of Vancouver in Canada. Have you done an analysis of the impact Energy East would have had on the economy of Atlantic Canada and Canada?

Mr. Poloz: No, sir.

Senator Mockler: Thank you.

The Chair: Thank you very much, Senator Mockler. I think we will make you an honorary Albertan. That is what I think.

Senator Day: We need him in New Brunswick.

The Chair: Before we move to a second round, I have two quick questions, if I may, for you, governor.

Many people, when I move around, ask me pretty straightforward questions. The question I’ve been getting recently is how is it that in Canada we have reduced our projections for growth from 1.7 per cent to 1.2 per cent, and kind of in the same hour the U.S. has kicked up their projections to 3.5 per cent? People ask me that. What would your short answer to that be? Why has that happened?

Mr. Poloz: A little bit of apples and oranges. As for 3.5, that’s Q1 —

Ms. Wilkins: Yes, that is the first quarter.

Mr. Poloz: So three point something that just came out for the U.S. is just for Q1. That was slightly surprising on the upside. Underneath it, it looks less robust because a lot of inventory accumulation occurred, and they are looking at weather effects that may have coloured the numbers. We are expecting that to continue to drift down because the fiscal stimulus from last year only lasts so long. By the end of this year, or early 2020, it’s done.

In Canada, the 1.7 and the 1.2 you’re mentioning are for this entire year, 2019. That’s our forecast. It was 1.7. Last week, we revised it to 1.2. The big driver is the same. It’s from Q1, so for the first quarter, we’re looking at a very soft quarter, second one in a row, because Q4 was quite slow. It’s a very difficult forecast to make because some of our indicators are quite strong. The labour market remains very strong, as I mentioned earlier. We have production indicators that aren’t too bad, but we have demand side indicators that are quite weak. Reconciling those gives us a thing where we may have a very low, almost minimal growth in Q1, and a run up in inventories, just as in the United States. We move that through the rest of the year, but that takes some adjusting. So this year, we average about 1.2. That downgrade is primarily from the winter are months.

Some of it could be related to the weather. We have hinted that. It was mentioned in the U.S. result. It’s being mentioned in some corporate results. For CP and CN rail, as mentioned, it was a really difficult winter for moving things — shorter trains, slower trains, frigid temperatures, et cetera. Well, those are our exports on those trains. The weakest thing of all has been the export numbers. There could be a build up of inventories because exports didn’t quite make it out of the port, and that those things are still on order, and they are going to catch up as the weather turns for us. That’s possible, we don’t want to assume it’s all rosy, so we are being careful about that. I’m hopeful that the weather turn around will give us some better numbers sooner than later, in fact, in the quarter we’re in now, when we get those data. But it will be some months before we will know.

The Chair: Thank you very much.

Senator Wallin: Can we pursue this discussion a bit? What we keep hearing from you is sort of the trade problems that Trump has created are behind all of this. Actually, the U.S. has become energy independent. They made that decision to do it. We have to sell our energy at a discount to them because we have got no other way to sell it to other buyers, so we sell it at a discount. They sell it for a profit to somebody else is — well, they are making money; good for them.

The result of the stifling or the reduction of investment in this country, in all sectors — not only energy, but across the way — comes from domestic issues as well as whatever Donald Trump might have done at some point. I think we have to wrestle with this question a little more, that Senator Mockler and Senator Verner have raised, which is we have got to get some numbers on the impact of not having pipelines, of not having transportation issues, of what might have been. I don’t know whether you don’t really get those numbers, or whether you have those numbers and don’t want to jump into a politically sensitive debate right now with Bill C-69, Bill C-48, elections and all that. Do you have those numbers? You said they are there; they are large. It’s got to be troubling and it has to be more impactful than we’re getting a sense from you on that. You can give that to Ms. Wilkins if you want.

Mr. Poloz: If you had a Trans Mountain pipeline, it’s only arithmetic to know how many barrels would flow through it. It’s kind of trite for me to say that’s how much it’s costing us. When Line 3 comes on, we built that into our forecast, so Line 3 is in there. It bumps up the number of barrels that we can deliver. We have also built in a rising capacity in rail because that’s a process which is under way. Every day there are more rail cars.

It’s not as though we are ignoring the issue, but to turn it on its head and say if it weren’t for this decision, we would have this much, I don’t think that’s our province. Our province is to figure out what we should be doing, given what is delivered to us in terms of policies and the economic activity, and deliver to you a stable rate of inflation. Through all that, we have hardly talked about that today, but inflation is 2 per cent, despite everything that we have been through. When you think back to 2015 and 2016, what we went through and the actions the bank took, two years later, inflation was back on target, exactly like the textbook says it should be. That’s worth at least reminding ourselves of. I’m not trying to brag to you about that, but that is our objective. That’s what we’re here for. Trying to understand all this helps us do it, but it’s not our job to pinpoint numbers, as you say, to be used in a political debate.

Senator Wallin: Fair enough.

Senator C. Deacon: Thank you again to both of you. I’m going to keep drilling in, if I could Ms. Wilkins, on the wealth generated from each hour worked. When we heard from you in the fall, I was really excited to learn about the extent to which you’re investing and analyzing productivity.

I want to get a sense of how we might be looking at the issue more broadly to make sure that we understand where we’re really lagging, and we have a way of informing ourselves of how to deal with that. We have lost capacity and lost opportunity in terms of productivity. We have been talking about one right here.

As well, in terms of the diversification of our markets, I think there are many lost opportunities. There is a lot of lost opportunity in digitizing various industries. There is opportunity for greater growth, or faster growth; value-added exports.

Where do we need to be focusing our attention? I’m sure on all of the above. You have better ideas than I, but the fact of the matter is you have better quantitative and qualitative data than any group in the country by far.

What are we going to start to see in reporting over time that will really help us as we’re looking at legislation coming forth in the future to make sure that we are getting the most revenue per hour worked in this country, and where we’re really backing the industries where we have got the greatest growth potential moving forward?

Ms. Wilkins: The bank is so interested in productivity growth because that’s what grows the size of the pie so that we have more to share. Per capita income only grows because of productivity growth.

When we look at the opportunities out there, clearly they come from a lot of directions, but digitalization is one particular area because it feeds into every industry. It’s not an IT industry. It’s an opportunity to use new technologies. AI and ML are the ones that everybody talks about, but of course there are others to really leverage kind of the expertise that Canadian firms have — not to necessarily replace workers, but to make those workers more productive. We see Canadian firms actually doing that. For the ones that say they are going to invest, that’s a lot of what they are investing in.

You think how can we enable that? It’s not our job, as the governor just said, to give policy advice. But when I look at the research, it sort of says what are the barriers to adopting or developing technology? They range from labour market policies that allow training to occur — that is, companies having the right incentives to train for longer-term investment in their employees — to the education system. When you start with the young, learning the right skills, there is that side.

I think that’s always been something that has been important for Canada and for every country. What is really new in this era is how do you create a framework for data, which is the foundation of all of the new technologies that will not only be fair to consumers and to people who are giving up their data, but also level the playing field, if you will. That is, having a really good, competitive and contestful environment for firms to be able to compete using the data that is out there. I think the data strategy kind of conversations that are going on is also a very important area.

I gave a talk a couple weeks ago. The G7, led by France, is very interested in competition and the implications of some of the new technologies for market concentration that we’ve seen over the last few years. I think that area is not unrelated to data but, again, competition policy is another area.

Senator C. Deacon: For me, what I’m really looking for is the potential dashboard that you may be providing going forward to give some insights into where we’re seeing real success and traction and where we’re seeing trouble.

Ms. Wilkins: We have a digital work plan that looks at a number of areas. One is measurement. Can I just say that for anybody who wants to have fact-based analysis that feeds into policy, you actually need to have the right data because you can make up a lot of stories, especially in the digital space. There’s a lot of hype.

I think another area that would be very helpful would be trying to understand how digitization is changing the structure of the economy, where workers are being demanded and where workers are having to transition, and how that might be changing the dynamics of wage determination and what people get paid. That will hopefully contribute to the policy makers.

Senator C. Deacon: So when we see a future report, we might start to see increasing insights in this regard from you?

Ms. Wilkins: I hope you do. Our primary goal is to inform how we do our business and how we understand the economy, but I think there’s a lot of crossover between that and what legislators like you need to know.

Senator C. Deacon: Thank you very much.

Mr. Poloz: That program is fantastic. I want to take it back to the macro for a second. Bear in mind what I said before that the makeup of the economy matters a great deal. You can have fabulous productivity going on in half the economy, and flat or zero productivity growth, or even half a percentage point, in the other half, and you get what you see. As that other half grows, you’re going to see it dominate the numbers.

Take, for example, labour market data churn and people switching jobs in order to better match their skills. If you have an engineer driving a taxi because he hasn’t found anything yet and then suddenly finds something, he gets a better match between his skills and his job. From the micro data, we know job changers who do not experience unemployment in between are getting, on average, a 12 per cent pay increase. You know that’s because it’s a much more productive job than the one they were in.

The more employment is switching that way and getting a better match and we stick to a 40-year low in unemployment, you know it’s happening.

I’m convinced we’ll see better measures of aggregate productivity as we go forward just for those reasons alone. But we have some headwinds, we know. In the energy sector, we’re cutting costs and all that stuff. We’re in a stressed period. We’re not going to get strong productivity growth until we get back into the daylight. That’s a pretty significant chunk of the economy. The health care sector in the United States is private and there is huge productivity going on there. In Canada it’s public, so it’s measured by how many people work there, not by output.

Those are a couple of differences. We just aren’t the same as the United States in terms of how we measure things.

By the way, it’s the hardest thing on earth to measure. The companies that say to me, “I got rid of four people in my back office. I had to send a cheque to this guy to get all my services on the iPad off the cloud.” All the investment is gone that they used to make. Investments are lower but his company is more productive. Where’s that? It’s everywhere, I find, except in the data. It’s going to take time for the data methods to catch up to this new economy. I’m convinced it’s occurring. I’m an optimist on this.

Senator C. Deacon: I’m grateful for your efforts.

The Chair: Governor and Deputy Governor, thank you, as always. These sessions we have with you are always very open and frank, and I hope you understand that while some of the questions have a bit of an edge to them, that is because we’re trying to understand. Folks want to know, from us, how it’s going, because they care about the country and they care about what you’re doing. You’re both doing fabulous work and we are indebted to you, so thank you very much.

Mr. Poloz: Thank you very much.

(The committee adjourned.)