THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Tuesday, October 25, 2022
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 6:30 p.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello, everyone, and welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I am the chair of this committee.
I would like to introduce the members of the committee beginning with the deputy chair, Senator C. Deacon, Senator Bellemare, Senator Gignac, Senator Loffreda, Senator Marshall, Senator Ringuette, Senator Smith and Senator Yussuff, who is with us.
Today, we continue our discussion on the state of the Canadian economy, with the topic of inflation. On our first panel, we have the pleasure of welcoming Mr. Robert Kavcic. He is the senior economist and director at Bank of Montreal, the BMO. Welcome and thank you for joining us by videoconference this evening. Mr. Kavcic, please go ahead with a few opening remarks, if you will.
Robert Kavcic, Senior Economist and Director, Bank of Montreal: Thank you to the committee for inviting me to speak this evening.
It is obviously a very uncertain and potentially challenging period for the Canadian economy here. Growth forecasts have been pretty steadily revised downward, inflation pressure is proving to be obviously very persistent, and monetary policy is going to have to continue to tighten in response to that. I will centre my opening remarks around those three issues.
On the growth outlook, our view is that there is now at this point a significantly better than 50% chance of a recession in Canada during the next 12 months. Specifically, we see zero growth in the fourth quarter this year, negative growth in the first and second quarters of 2023 and then a mild rebound through the second half of next year.
We expect the depth of any technical recession to be relatively shallow, but the flip side is that it could prove to be pretty drawn out. Given the massive amount of excess demand that was pulled forward into the pandemic, we very well could see a prolonged period where the economy kind of stagnates at a below potential pace as an offset to that. When you look at our growth forecast from the middle of this year through the end of 2023, we are looking at annualized real GDP growth of just slightly better than zero. That kind of speaks to the stagnation period we are looking at for underlying growth.
One supportive factor is the job market. The reality is that we are entering this period with an exceptionally tight labour market and a historical amount of excess demand from employees. It is the very conceivable outcome in this cycle that as the economy weakens, it does so by eliminating a lot of these excess openings rather than creating significant job loss. Because of that, we actually see the unemployment rate rising to 6.5% late next year. That is up notably from where we were in the summer, below 5%, but it is not quite a level we would historically be worried about as a level that would create a lot of default and things like household insolvency. That is one positive take away from where we are now.
On the inflation front, we saw headline inflation peak at just over 8% in June. Prices for gasoline and various resources have eased off. Goods prices are showing signs of backing off as demand wanes, but there is still pretty persistent momentum in prices for services, and also very important, because of what we are seeing in the labour market, an upward pressure on wages.
The very short takeaway on the inflation front is that getting inflation down from 8% to around 5% is probably going to be relatively quick and easy, and we could see that very soon, but the next step, getting from 5% back down to the Bank of Canada’s 2% target, is going to take quite a bit more time and require more policy pressure.
That leaves us facing higher interest rates in the near term, still, starting with another Bank of Canada rate hike that is pretty widely expected tomorrow. Our view is we are going to see another 100 basis points of Bank of Canada tightening through the end of this year. At that point, we judge that policy is going to be tight enough and inflation will be showing signs of moderating through the early stages of next year, and the bank at that point will be able to pause and allow some of the past rate hikes to work through the system, because it does take time. We know that monetary policy works with lag.
When all is said and done, the pretty cold reality for the Canadian economy is that we are seeing probably the most abrupt tightening of borrowing costs in at least 30 years in Canada, and we are starting to see some consequences of that in the real estate market, which is correcting pretty significantly across most parts of the country, and consumer confidence and inflation expectations as well.
That is the background from our perspective. I will leave it at that and, of course, be happy to take any questions.
The Chair: That’s great, although I won’t say comforting or reassuring. You said that to get from the 5% back to the Bank of Canada 2% rate, that will require policy pressure. Can you elaborate on how you define that?
Mr. Kavcic: Sure. What I’m really saying there is higher interest rates.
The Chair: Okay.
Mr. Kavcic: If not, further tightening from here in terms of the level of interest rates, but also probably holding interest rates at these higher levels for some time going forward rather than the Bank of Canada being able to simply turn around and cut rates quickly.
The Chair: You’re not talking about other budgetary matters?
Mr. Kavcic: No. This would be predominantly monetary policy.
The Chair: All right. We will start our first round of questions with Senator Deacon, our deputy chair.
Senator C. Deacon: Thank you very much, Mr. Kavcic, for being with us today.
Just to stay on the real estate question, we have seen huge increases in asset values in homes across this country, which have now started to level off. I saw some information indicating that we had one of the biggest real estate bubbles globally in the Toronto market, in Canada. We now have the mortgage rates rising and costs rising for those who own rental properties, which is being passed on now in higher rents for those who haven’t had the privilege of benefiting from increased real estate prices. This is getting into a very challenging issue. We could see, as we did in the early ‘80s, mortgages below water or housing prices below water. It can bring an awful lot of pain. I’m wondering where you see us at this point, because for me, it is a little worrisome that we were not able to control the bubble as we knew it was occurring, and now we have hit it with a sledgehammer. Over to you.
Mr. Kavcic: It is worrying, for sure. It is something we have been monitoring through the entire pandemic. To be frank, we were warning of the consequences of this bubble pretty early on. I think what we are seeing now is that excess is being unwound. There is a lot to unpack here in this issue, but I think for sure it is one of the biggest risks and biggest headwinds for the Canadian economy.
You mentioned a couple of things. On the price side, I think our official forecast is for a 20% peak-to-trough decline in prices nationally through the middle to later stages of next year. Realistically, we have already seen some markets come down 20 or 25%, specifically parts of southern Ontario and British Columbia.
The reality here is that when you take a market that was pretty fully priced at 1.5% mortgage rates, which we were seeing Canadians borrow at through 2021, and you quickly raise those mortgage rates to 5% and above, if you are going to hold all other factors constant — like downpayment sizes and amortization lengths — to maintain that same affordability, you have to cut about 30% off the price of the asset. That’s just to keep things in balance as they were. There is no way around the price correction, and we are already starting to see that in the market. The market is not clearing at past prices anymore. With that in mind, there will be some investors or homebuyers underwater for some time.
I think one of the other big issues we have to be mindful of here is that we saw a big rotation of borrowing into variable rate mortgages through 2021. Based on my arithmetic here, about 20% of the outstanding mortgage market was variable rate mortgages taken out at around the 1.5% level. What’s happening now is households are not necessarily seeing those payments rise significantly or being hit like a sledgehammer, like you say, as it stands today, but amortizations are getting stretched out, so when those mortgages come to renewal, they’re going to be coming to renewal with, in a lot of cases, outstanding balances similar to where they were at origination. At some point in the next three to five years down the road, unless something changes with interest rates, there will be a significant headwind coming in terms of payment shock for many households. That’s another thing we have to be mindful of beyond just the asset price itself.
Further to that, there are spillover effects in the new construction area. We have pretty ambitious supply-side targets in Canada. The reality now is that new construction sales are simply not selling at all, so builders, through the course of the next year, will have to start pulling back on construction activity rather than bring more supply to the market. When we come out the back end of this cycle, we could very well be setting ourselves up for a situation where we are again constrained by the supply side and have affordability issues when everything resets.
I know there is a lot to unpack there, but that is some of the high-level stuff.
Senator C. Deacon: In terms of the rental side, could you speak to how this is affecting rental rates for Canadians? That is a big concern. Those are the Canadians who don’t have the asset to fall back on.
Mr. Kavcic: The rental market, as you touched on, is doing the opposite of the resale market. As the resale market has weakened, the rental market has actually tightened up and strengthened. There is a lot going on there too. The simple arithmetic is that as interest rates rise and you are an investor with a multi-unit property, the simple carrying costs alone of that property will dictate upward pressure on rent if the market can absorb it and is tight enough to bear it. The flip side is that the market is tight enough to bear it because we have a persistent undersupply of quality rental stock in Canada.
At the same time, we are seeing immigration flows come back very quickly. Year over year, in the second quarter, we saw the biggest raw number increase in international immigration flows into the country that we’ve seen in a decade, in the range of 500,000 to 600,000. A lot of that is students and non-permanent residents, but those are typically people who fall into the rental stock, so we had a very quick tightening up of the rental market. These factors are all combining to strain that side of the market.
One thing that we are keeping an eye on that might ease the pressure a little bit is that a lot of investors through the course of the last two or three years — and remember that multiple property purchasers were, at the margin, the biggest source of housing demand through the pandemic — are maybe coming to test the market right now and seeing they can’t get the price they are hoping for or the price they need to liquidate a property, so what they are doing is flipping that back onto the rental market because that rental market is so tight and the dollar rents have risen so much over the last two years. There is a hope here on my end that some of this dynamic starts to play out and that some of the past housing construction starts that come to completion get pushed onto the rental market because the resale market is so soft, and it takes some of the pressure off the rental side.
Senator Loffreda: Thank you, Mr. Kavcic, for being here this evening.
Summarizing the housing correction, you mentioned that t was the biggest risk to the Canadian economy. The real estate markets are already down 20 to 25% in certain markets, and there is no way around the price correction. There is a payment shock coming to many households. Yet, when you do predict the depth of the recession, you have mentioned you foresee the depth of the recession being shallow, with a mild rebound in the second half of next year. I remember from my banking days that the last thing Canadians would stop paying was their mortgages. Given all this, why do you see only a mild recession?
Mr. Kavcic: A few reasons: I think the biggest factor I want to differentiate on the housing side is that there is a difference between the financial asset price and the underlying supply and demand fundamentals, which are more demographically driven. The demographic supply and demand fundamentals in housing are still solid. We have a demographic need to continue to build and supply residential real estate. That is simply because of what we are seeing on the demographic curve here with millennial households and the international immigration flows.
The asset price itself is a different issue, and that’s where we saw a lot of the froth. Our thinking on this is that higher interest rates are cleaning out a lot of the froth in the actual price of the asset itself and a lot of the speculative activity that was built on the fact that prices were rising. The underlying demographic supply and demand fundamentals are still in place, so that should eventually limit how much real activity gets cut back even as, on the nominal side, we do see the price come down. That’s part of it. I’m sympathetic to the fact that builders will have a very hard time continuing to build at the current pace over the next two years given this backdrop.
The other part of it is that we see a strong labour market here as well. Households got through the pandemic in a very strong financial position. It was the only recession where we saw disposable income at the household level go up, and it went up significantly. Households were actually able to bank a lot of those savings, so they have a pretty good cushion to lean back on. In the job market, our hope is that we can go through this downturn where we have a correction in asset prices in real estate and various other factors, but we don’t create a lot of job loss because there is so much excess demand out there.
We kind of combine all of the buffers we have: household balance sheets which came into this strong; excess demand in the labour market, which, hopefully, keeps job losses limited; and various other checks and balances in the system such as a stress test, which has, hopefully, already proved Canadians’ ability to sustain higher mortgage rates. The fallout in the real economy is limited or spread out over a longer period and is not a significant acute shock to the real economy, even as the asset price itself is, in fact, coming down quite a bit.
Senator Loffreda: Thank you.
Senator Yussuff: Thank you, Mr. Kavcic, for being here.
My question has to do with the debt load of Canadians being fairly high. A number of Canadians are at a debt load we haven’t seen, at least not in my lifetime. What I haven’t heard from you and others so far is what this will do in regard to foreclosure for those people who are on the margins already.
Secondly, on the bigger question, if the economy does have a correction and there will be a recession, what is the likelihood of personal bankruptcy, given that people can’t continue doing what they are doing and have to deal with the challenges ahead of them? Is this something we are going to see in a latent period as the economy tanks, whether it’s later this year or early next year? Do you have any observation on what might be the outcome?
Mr. Kavcic: These are legitimate risks. This is the most pronounced increase in borrowing costs we have seen in a generation, so it is something we are mindful of.
I refer to my comments about the state of household finances coming into this period. The balance sheets are relatively flush with savings, and we have a strong job market to fall back on. That is in our base-case scenario, and we are hopeful that the job market holds up.
The other piece is that even as Canadians were borrowing at 1.5% through the height of the housing boom, at a federally regulated institution, they were qualifying at 4.75%. They were qualifying for most of that period at 5.25%, and most recently, they have been qualifying at the contract rate plus 2 percentage points. In some cases now, those stress test rates are up around the 7% mark. I know there was a lot of debate about why these stress test levels were set so high during that low-interest-rate period. It’s a good thing they were, because now households are going to be tested. Presumably, the capacity to pay is pretty solid in the Canadian economy because of all these factors.
That, I think, should keep a cap on mortgage delinquencies. Historically, Canada is a very low-delinquency jurisdiction because we do pay our mortgage payments first, we have much more conservative lending standards, we have these stress tests that have been in place throughout this entire period and we have full recourse in our mortgage lending here, unlike some past episodes that we have seen in other countries. Historically, there’s a pretty good precedent of mortgage delinquencies remaining quite low.
On the personal bankruptcy side, I think this is a bit more of a concern — not necessarily in the next 6 to 12 months, because most homeowners on 1.5% original variable-rate mortgages have fixed-payment features where their payments aren’t actually rising in line with the Bank of Canada’s tightening pace right now. However, at renewal, they will be hit with a pretty significant payment shock as they renew and re-amortize back down to 20 years at presumably a much higher interest rate still at that point down the road. This is something we have to be mindful of — not next spring but three, four or five years down the road, depending on where the level of interest rates settles. For sure, that will be a pretty significant test for households if rates are still at these levels.
[Translation]
Senator Bellemare: I will ask my question in French, but you can answer in English if you are more comfortable.
My question is simple: Do you think the Bank of Canada’s current strategy will succeed in bringing inflation back to the target level of around 3% fairly quickly?
[English]
Mr. Kavcic: Will the Bank of Canada’s strategy succeed? I think it will. There is a lot of precedent for this. The questions we have to answer are why is inflation high and is tighter monetary policy going to be the tool that brings inflation down?
There are a number of reasons why inflation is high. Obviously, we have had some big swings in resource prices. That’s outside the jurisdiction of Canada and not something that Bank of Canada policy is going to influence — things like food prices and oil prices. We have had some supply-side disruptions during the pandemic that have contributed to higher prices for cars and consumer goods. Those disruptions are starting to clear now. To some extent, that is an issue that is also outside the control of the Bank of Canada.
When you look past those two factors and you look at what is left, there is still a lot of excess demand in the Canadian economy, similar to the U.S. economy. That excess demand for labour and for consumer spending — we saw it in real estate as well — is something that Bank of Canada policy can address. We talked about real estate for a while already. You saw what happened to the housing market when the Bank of Canada first raised interest rates by 25 basis points. The housing market went quiet immediately.
In our view, a big portion of the inflation situation in the developed world is because of excess demand from very easy policy through the pandemic, and that’s what higher interest rates are going to work to cool down. We know that monetary policy takes some time to work through the system and bring these inflation numbers down. However, I’m pretty confident that, in terms of where interest rates are expected to be at the end of this year and as we go through 2023, we will see some pretty meaningful progress on core inflation in Canada coming back toward the target.
Senator Bellemare: Are you afraid of a boomerang effect on the price index?
Mr. Kavcic: A boomerang effect in that we bring inflation to the downside?
Senator Bellemare: No. Interest rates, mortgages and rents are increasing, and it is more expensive for investment and so forth. This could have a boomerang effect and increase inflation.
Mr. Kavcic: There are certainly components of inflation that are driven by higher interest rates. You mentioned mortgage interest cost as one example. Housing is a unique part of the CPI because, when house prices fall, they are disinflationary. As interest rates rise, house prices fall. That is disinflationary immediately, but over the medium term, higher interest rates do add to inflation directly in the CPI through mortgage borrowing costs. However, that’s a pretty small component of the overall CPI. On balance, I think the downward pressure across a wide range of consumer and household goods that you get from higher interest rates and weaker demand, and especially through the wage channel and the labour market, far outweighs any upward pressure you are going to get in a few specific components like mortgage interest costs.
The Chair: I wanted to get your take on this: Our witnesses in the last couple of weeks have made a point of saying that inflation is now a homegrown issue — that this is not about the war in Ukraine or COVID or anything at this point but that this is internal behaviour. Is that your view?
Mr. Kavcic: Yes, that has been mostly our view all along. Even before the war in Ukraine, we had well above target inflation. I think what happened is that the war exaggerated a lot of the inflation pressure, through the commodity channel specifically. Before that, we saw pretty clear evidence that inflation was running well above target. With the numbers we are looking at now, especially on the service side of the inflation basket, service prices are very domestically oriented. This is not oil or grain prices. This is domestic services, and various aspects of domestic consumption are still well above target as well. When you look across the CPI basket, 80 or 90% of individual components are running at 3% or higher right now as well. The breadth tells you that this is not, and never has been, a transitory shock to the economy that came from outside. This was excess demand in the economy.
The Chair: Thank you for that.
Senator Marshall: Thank you very much for your comments.
You have been fairly optimistic so far, which seems to contradict what the Minister of Finance was saying last week. You are saying that you expect a shallow recession.
In your opening remarks, you referred to something that I’d like you to clarify. You were saying, “unless something changes in the interest rates.” Were you talking about interest rates going a lot higher than what you think?
Mr. Kavcic: I think that is probably the risk to our forecast, yes. Our forecast is based on the assumption that the Bank of Canada will be done raising rates after another 100 basis points from here, around the end of the year, and then we will start to see pretty meaningful signs that core inflation is cooling and the labour market is slackening, especially on the demand side. That would allow them to pause. If there are other factors that arise and extend this run of inflation we are having, or if inflation simply doesn’t break at these levels, as we expect it will, then the risk is higher interest rates and, yes, a deeper recession. If I had to lean in one direction, I would probably lean that way rather than the more optimistic side.
Senator Marshall: I would like to hear a more pessimistic option from you, because I’m one of those homeowners who renewed at 22% back in the 1980s. The interest rates we are seeing now are not that high, and people are having trouble coping. If this recession is more severe than what you are anticipating, people now have recently bought homes, at the encouragement of the government, by the way, and they have mortgages that exceed the value of their homes, and I think at some point in time, when they are starting to have problems paying their mortgages, they are just going to walk away from those assets. Of course, the government has insured a lot of those mortgages. Could you be a bit more pessimistic in your comments? I’m more pessimistic, and I was surprised by what the Minister of Finance said last week. We have the International Monetary Fund and a lot of people saying that it is going to be a deep recession. Could you talk about the housing sector on a little bit more pessimistic note?
The Chair: We are going to rate you on the pessimism scale here, so go ahead.
Mr. Kavcic: On the bull-bear scale, I thought I was still tilted pretty far to the bear side in my opening comments.
To your point on interest rates, here is the thing. I often hear that our parents paid 15 or 20% mortgages back in the late 1980s. That is not that debilitating, but it is. It’s not the level that matters; it’s the change that matters for economic growth. When you are given and become used to 1.5% mortgage rates and you go to 5%, it’s every bit as debilitating as the interest rate shock was that we saw through the late 1980s cycle that created the housing downturn in southwestern Ontario. Apples to apples, it’s every bit as stressful as that one was. A lot of other things went bad through the early 1990s to take what started as a correction in real estate and made it a much longer, deeper and more prolonged recession. We had big demographic drain. We had a fiscal crisis in Canada as well that made the whole situation that much worse. We don’t expect that this time.
To your point here, if inflation doesn’t break — and we have to see the Bank of Canada tighten beyond what we are expecting in our forecast and beyond what the bond market is expecting — yes, households are going to be stressed pretty considerably, especially at renewal for a lot of these mortgages that were taken out. When you have houses that are underwater, so to speak, or a negative equity, it really throws sand in the wheels of the economy because it forces a lot of households to lose mobility and become locked into their current situation. If someone loses a job, for example, and wants to move to a different industry in a different part of the country, if you’re in a negative equity position, you can’t. It slows down the overall mobility and potential of the economy. That is certainly something that we’re probably going to be dealing with for some time.
I’m not trying to downplay this as a major issue. It’s a significant issue. It’s going to look a lot different than an immediate hammer to the economy. It’s going to be something that is more of a really heavy wet blanket that sits on the economy and on households for a number of years going forward.
The Chair: Thank you. I think that’s pessimistic enough for Senator Marshall.
Senator Gignac: It’s nice to see you again, Rob.
First, let me congratulate BMO economics for the currency of your forecast. I follow a lot of economic themes from Bay Street. You have been very accurate here to date on the interest rate forecast.
Let’s talk about the transmission lag, monetary policy and neutral rate. If you can answer in three or four minutes, that would allow time for my colleagues.
With people who have chosen variable rates over the last two years, is it fair to say that transmission lag of monetary policy will be faster this time than in the past? We have never seen people up for variable rate so much.
Second, to know whether the current monetary policy is restrictive or not, it’s related to the neutral rate. Before the pandemic, a lot of experts mentioned the neutral rate. I’m curious to see if this neutral rate is way higher in this post-pandemic period with the global change under pressure.
If you can summarize in three or four minutes, Rob, I would appreciate it. Thanks.
Mr. Kavcic: Those are good questions, for sure.
To your point about transmission being faster, I think there might be some truth to that, but policy still does lag. When you look at what is happening in the mortgage market today, we say we will not see this fully built into the real estate market until at least the middle of next year, if not later, because the mortgage pre-approvals are a good example of how policy lags. You still have pre-approvals in the system from 120 days ago. That’s 125 basis points. Tomorrow, it will be even more of tightening that is not yet reflected in physical contracts that Canadian have to go out and get a mortgage. The pricing today doesn’t actually yet reflect interest rates on the ground. We will see that next year, so that’s part of it.
Variable rate mortgages are obviously more common now, so in theory, yes, those payments should be increasing in real time as the Bank of Canada raises rates and choking off discretionary spending in real time. The vast majority of variable rate debt in Canada, mortgage debt, has a fixed payment feature where, to this point, payments haven’t actually risen as Bank of Canada policy rates have risen. They have been built into the underlying mortgage balance, and effectively amortizations have been stretched out. I’ll say that after tomorrow if we get a 75-point basis point rate hike from the Bank of Canada, a lot of people that took out mortgages around 1.5% with a fixed payment feature are going to be getting phone calls from the bank because they no longer will be covering all of the interest on those mortgages. To that extent, yes, maybe the pass through is quicker.
Senator Gignac: How restrictive is the monetary policy? Is it very restrictive? Let’s assume it’s already at 4% or not too restrictive? Is it comparable to the neutral rate?
Mr. Kavcic: There are two ways to look at this. The neutral rate is probably higher than it was in the past. Our expectation coming out of this cycle is that neutral rates across the developed world end up moving up compared to where they were over the last decade. Maybe we’re looking somewhere in the 2.5 to 3% range as neutral. We don’t have an official estimate on that, but I think the direction is higher.
In terms of this actual cycle, even at current policy rates, interest rates are still negative in real terms. Our view is that we actually need to see zero or slightly positive real interest rates after core inflation, hence our forecast of Bank of Canada policy rates rising to 4.25% and core inflation settling in at around 4 or 4.5% or so to get us to zero real interest rates where we think that would be restrictive enough to pull inflation and demand down.
The Chair: Very interesting.
Senator Smith: Thank you, Robert, for being here tonight.
A recent report by CBC looked into the issue of mortgage fraud. In the investigation, undercover agents engaged in fraudulent activities in some cases suggesting to prospective buyers to falsify income documents and letters of employment in order to get approved. I’m not trying to recreate negativity. Could you comment on the risk of fraud in the mortgage industry and its potential impacts on the economy generally and how the banks are counteracting this practice? Is it actually spread out to the point where it’s creating a structural problem for some of the banks? How will the banks handle this? Is this a small, evolving problem, or is it a bigger problem?
Mr. Kavcic: Well, unfortunately I don’t have too much to say on this because I don’t have any hard data. As is typical in any cycle that becomes frothy and starts to create bubble-like conditions, fraud is usually one of the last markers of the cycle. We saw it in the U.S. We saw various other examples of that historically. I’m not surprised to hear these anecdotes, but from my perspective, it is anecdotal. Unfortunately, I don’t have too much to add on this simply because I’m not in the position where I look at mortgages and deal with mortgages coming across the lending desk, nor do I have any hard data on it to really comment.
Senator Smith: What you’re saying is that Canadian are good people and they will honour their commitments to the banks. “O Canada.” Thank you very much.
Senator Woo: I would like to ask about the external sector, starting with exchange rates and whether the falling Canadian dollar perhaps continuing to fall will exacerbate imported inflation. Conversely, will the lower dollar make a significant difference to exports and improve our current account surplus, hence boosting GDP growth? Then, to broaden out the question, might U.S. dollar strength due to very high and aggressive tightening on the part of the Fed lead to forced tightening on the part of other countries, precipitating recessions around the world and dragging us all down with them?
Mr. Kavcic: Yes. This is another important risk. What is happening in the U.S. economy and with the Federal Reserve? This is one area where we would be a little concerned as well. When we look at this as forecasters, there is a lot of evidence that the Canadian economy is more sensitive to interest rates, so it will probably start to slow down sooner and probably a little more abruptly. We’re seeing it in real estate already.
Also, the way the mechanics of inflation in Canada work means inflation in Canada is going to cool sooner than it is in the U.S. because of various technical factors that I don’t need to get into here. Arguably, inflation in Canada will cool sooner. In theory, that should allow the Bank of Canada to back off from raising rates before the Fed. The problem with that is that every time the market starts to sense that, it pulls down the Canadian dollar, which, as you mentioned, is inherently inflationary. Our estimate — I think it’s the consensus view on this; the Bank of Canada has modelled this as well — is that roughly every 10% depreciation in the Canadian dollar versus the U.S. dollar adds about .5 to .6 percentage points to Canadian inflation domestically through the imported price channel.
At the end of the day, the Bank of Canada can’t get too far behind the Federal Reserve with the inflation target in mind even if certain sectors like real estate are slowing quite a bit more significantly than in the U.S. That is an economic risk for sure. We have to overtighten simply because the Federal Reserve can’t get the U.S. inflation situation under control. I think we have to be mindful of that.
To your other question on the trade side, I think yes, arguably, there is some scope for a net positive outcome for net exports, but the currency effect might get overshadowed by the reality that the U.S. is probably going through a pretty significant slowdown in demand as well. The currency effect is incremental against the overall lower level of trade activity, so it’s not necessarily something that is going to buffer the downturn. It might make it feel a little less bad for a few sectors of the Canadian economy.
Senator Woo: What is your implicit U.S.-Canadian dollar forecast for the end of the year or first quarter next year?
Mr. Kavcic: Right now, if you’re looking at it on this basis, we’re at around 73 cents in the market today. We have a little bit more weakness through the end of this year to around 72 cents, and then by the end of 2023, 75 cents. We think peak U.S. dollar strength is probably coming around the first quarter of next year. That is more or less consistent with when we think the Fed is going to reach its terminal rate and the market will start to eventually price in rate cuts in the U.S. further down the road.
Senator Woo: Thank you.
The Chair: Thanks for your comments. We will go into the second round. Before we do, Mr. Kavcic, are we in recession at this point?
Mr. Kavcic: By traditional definitions, no. This becomes an academic exercise in terms of marking recessions. You need depth of a decline in GDP. We haven’t seen that. You need a duration of decline in GDP — typically two quarters — and we haven’t seen that in Canada. You need a wide dispersion. Yes, we have a recession in real estate, but we don’t have a recession in the job market broadly. We don’t have a recession in service sectors of the economy. So I would say no at this point.
The Chair: How would you assess the U.S.?
Mr. Kavcic: I would assess the U.S. the same way. Technically, we did see two negative quarters of growth in the U.S., but there were special factors on the trade and inventory side that didn’t meet the other criteria for recession, so we are not there yet.
Senator C. Deacon: Thank you for your tremendously clear comments. They are really helpful.
I’m just wondering about the role of non-monetary factors in helping to reduce inflation in Canada. I have noticed the Competition Bureau initiating a market study in grocery pricing. We have seen increased action and focus on the role of the Competition Bureau in Canada. I’m just wondering what your thoughts are on the importance of competition and increased competition in catalyzing innovation and as an incentive among firms to keep sharpening their pencils and keep inflation under control.
Mr. Kavcic: Those are very fair points, for sure.
One thing we have to do is consider the time frames we’re working with here. A lot of this would be longer term in nature. Things like more competition and productivity at the firm level would dampen certainly inflation. It would increase potential output in the economy and dampen inflation over a longer period of time. Would measures like that work to bring down inflation over the next six months? Probably not. That’s where the role of monetary policy comes in. I think these are very fair objectives and very legitimate areas of policy that could improve potential output productivity and dampen inflation, but timeliness matters where we are right now.
Senator C. Deacon: I really appreciate your focus on the context of time, but it is an effective strategy over the long haul. Thank you.
Senator Bellemare: To pursue that issue, don’t you think the monetary policy will actually have a negative impact on productivity growth? In other words, even though it can battle against inflation in the medium term, what we are doing now compromises our possibilities of stimulating productivity.
Mr. Kavcic: I think there is short-term pain in terms of bringing the inflation target back down. When you look at the economy as a whole, low and stable inflation is something that drives investment, which drives productivity over the longer term. I hear your point that we’re going to create significant loss in some industries. There is probably going to be a reallocation of resources in the economy as a result, which is counterproductive for now. However, in the long run, if we’re looking to attract capital to Canada and create business investment, which is inherently productivity creating, then low and stable inflation is one of the key features that we need in this economy over the long term to actually maintain that.
Senator Bellemare: Thank you.
Senator Gignac: I’m curious to have your opinion about whether there is any relationship between money supply and inflation. Last week, we received a high-profile professor from Johns Hopkins University who created some reaction inside this committee. When I started my career, it was all about money supply. I have some grey hairs. You know about that. However, now the Bank of Canada seems to not follow that. The professor mentioned they did an analysis across countries, and he established a link between the inflation rate and money supply country by country. Is this something we have to follow? Is it something the Bank of Canada has to follow? I’m just curious to have your opinion regarding that topic.
Mr. Kavcic: I think it is. There is a lot that goes into the inflation story, and if you’re being realistic, you would very much assume that significant increases in the money supply do add to inflation. The monetary phenomena — too much money chasing too few goods — is your textbook inflation-creating situation; right? Money supply does have a factor there. When you look across the developed world, Canada has not been alone on this front in terms of — especially through COVID — increasing the money supply and bringing in programs like quantitative easing to shore up liquidity in the financial system and measures like that. It is a factor for the inflation side. I think there is merit to that, yes.
Senator Gignac: I’ll quickly ask a question, just because when you read the report of the Bank of Canada, their dashboard does not relay this kind of indicator. Money supply does not seem to be on their radar. I am curious if you think it’s something missing or if it’s just that we have a new era or a new regime. I’m just curious to have your guidelines regarding that. We will receive the Governor of the Bank of Canada two weeks from now.
Mr. Kavcic: I think there is probably some merit to it, yes. Obviously, as I said, there are a lot of factors that drive inflation. Relatively, in terms of the importance scale, maybe it doesn’t have a prominent position, but I think to do fair justice, you would have to consider changes in the money supply.
Senator Gignac: Thank you.
Senator Loffreda: I’m concerned about the housing market, which is very important for Canadians. Going back to your prediction on a mild rebound in the second half of next year for our economy, could you elaborate on how long you forecast interest rates to remain high in order to tame inflation?
Looking at the why sometimes leads to finding solutions to the proper monetary policy going forward. If we look back, it has been 40 years that we have had a growing economy. Obviously, we can’t have endless economic growth, but at this point we’re seeing wild deviations with respect to housing prices and inflation. If you were to pinpoint two or three major reasons for that, what would they be? You did mention that it was excess demand. We have scarce resources. The war has accelerated the whole process. Maybe you can elaborate so we can have your thoughts on that.
Mr. Kavcic: Sure. There is a lot going on here.
I think the simplest way to put it is that, throughout the pandemic, we probably compressed a number of years’ worth of demand into a very short period of time. The easiest relief valve for this major imbalance in the global economy and in Canada is through prices.
Take housing, for example. We had a significant increase in demand for housing through the pandemic because people were looking for more space. They were moving out to different markets. The demographic situation in this country saw a lot of people that were maybe on the fence about buying a house at some point over the next few years and pulled those purchases forward, and all of that demand came onto the market at a time when there was no additional supply. Prices went up, and it was facilitated by low interest rates.
Think of inflation for consumer goods as well. When we were locked down in the early stages of 2020, what did a lot of people do? They renovated their houses. They bought things like exercise bikes and television equipment. The increase in demand for consumer goods was dramatic. In the U.S., if you look at where consumer spending on goods moved to relative to the pre-COVID baseline, there was about a $300 billion increase in consumer spending on goods in the U.S. — not total, but in addition to what was normal. We called it supply chain constraints, but the reality is no supply chain would be able to satiate that kind of dramatic and sudden increase in demand. That’s why supply chains are bottled down. Of course, the relief valve for that is prices.
This was an extraordinary economic shock that contributed to this. We are eventually going to recalibrate ourselves and find balance again, but it will take time just given how significant the shock was.
Senator Loffreda: Do you have any forecast on taming inflation and lowering interest rates? How long will that take?
Mr. Kavcic: Sure. Our view is that the Bank of Canada is done raising rates at the end of this year, but the market has periodically, over the last six months or so, started to price in rate cuts in 2023 in both the U.S. and Canada. Our view all along has been no, that will be too early to actually tame inflation. We think we will have to raise rates to about the 4.25 mark, a little higher in the U.S., but then policy-makers will have to hold there for the better part of a year to actually make sure inflation does settle back down.
Senator Loffreda: Thank you.
The Chair: The supply chain comment was very interesting. What do you make of energy? We’re going to obviously be witnessing what we see in the U.K. and Europe this year with prices going up. What do you anticipate here?
Mr. Kavcic: Energy is a bit of a harder one to predict because supply changes and geopolitical disruption can have a big impact there right now, as they always do. It’s harder to predict.
I think the winter will be pretty tough. We are getting a bit of relief right now in areas like natural gas prices because we’re not in the cold season yet and there is a lot of excess storage building up at various facilities. As we go into the winter, those storage facilities will get drained down. We will probably see upward pressure on gas prices again, for natural gas.
Oil price is a bit of a wild card too. I think OPEC and OPEC Plus have been pretty clear that they want oil prices up around these levels, just based on some of the recent moves they have made on the production side.
The last thing that I’ll say here is the U.S. is an interesting player in this because they have a lot of production capacity as well. If you remember what happened back in 2014-15, when oil prices really came down, it was because U.S. production really ramped up and put a lot of supply on the market. There is a lot of capacity out there in the shale sector in the U.S., but that sector is not really producing at full capacity right now, even though the prices are there, because there is a lot of demand from the investor side to rebuild balance sheets and things like that. There are labour shortages that are persisting throughout various aspects of that part of the U.S. economy where they just can’t physically produce oil at the rate that maybe they would want to right now. That’s another potential supply side valve closer to home, compared to obviously the issues out in the Middle East and Russia.
The Chair: We’ll see what happens in the midterms there too.
Senator Yussuff: Just on the topic of some of the causal issues that deal with inflation, one of the areas that the Governor of the Bank of Canada has certainly focused on is giving advice about wages, yet wages overall haven’t increased to the rate of inflation. Wages are, on average, I think about 5% right now. There have been no real discussions on price increases that we are obviously seeing in the media this week. Canadians are very frustrated with grocery chains and others that they feel are ripping them off in regards to the prices they are forced to pay, yet there has been very little conversation about the price hikes that are happening. The one area that most economists are focusing on is wages, yet wages have not risen to the level that would keep workers abreast of inflation. Do you have any thoughts as to why this kind of, I guess, lack of comment on prices is happening in the economy, which is moving the inflation and causing some real challenges for people trying to afford food products and what have you at the end of the day?
Mr. Kavcic: I’ll say the wage pressure is starting to build. Wages tend to lag a little bit through the cycle. You tend to see the economy tighten up, then you see inflation pressure, and then because of lags in the bargaining and hiring processes and things like that, wages tend to come a bit later. They are following inflation, not quite as quickly as they are in the U.S., where the labour market is arguably even tighter, but wage pressure is building. We’re seeing first anecdotes of it in public sector bargaining rounds, where we’re seeing baseline wage increases up and above anything we have been used to going back over the last 5 to 10 years. We’re seeing in the private sector data as well that wages are gradually catching up.
The simple reality is that the labour market right now is so extraordinarily tight that we have a million job vacancies in Canada and we have roughly a million people unemployed in Canada. Historically, we have never seen a job vacancy for every unemployed person in this country. It speaks to how tight the labour market is. If you’re a firm right now that wants to hire, you’re going to have to pay. That’s really the bottom line.
I think that’s why there is a lot of urgency here too within the Bank of Canada, because they know that the wheel of wages is starting to turn right now, with inflation as the backdrop. If they let this run for too long, the more wages are allowed to increase, the more demand pressure that puts on the economy, the more that adds to inflationary pressure, and the cycle continues. That is really why we’re seeing this abrupt tightening cycle.
Senator Yussuff: Prices have also risen about 20% when you look at some of the data published, yet there has been no comment about the rise in prices compared to what workers are demanding. Isn’t it a bit unfair to put all the blame on workers, yet at the same time prices are way out of whack?
Mr. Kavcic: To that point, the real wage among Canadian workers has fallen, absolutely, and real purchasing power among Canadian households has fallen, and that’s one of the issues. That’s why we are seeing upward pressure now, because firms have the demand and they have the capacity to pay.
The Chair: Thank you very much. I’m sorry we are out of time here. We really appreciate your comments, Mr. Kavcic. You were crisp and to the point. We have covered a lot of turf. Thank you for joining us.
Hon. Senators: Hear, hear.
The Chair: You are getting a round of applause.
Senator Deacon will be taking the chair for the second panel. Thank you.
Senator Colin Deacon (Deputy Chair) in the chair.
The Deputy Chair: We are welcoming Mr. Andrew Sharpe to our second panel today. Where the questioning ended up with Senator Yussuff and our previous witness lays the ground quite well for the Executive Director of the Centre for the Study of Living Standards.
Andrew Sharpe, Executive Director, Centre for the Study of Living Standards: I would like to thank the committee for the invitation to appear before you today.
I am the Executive Director of the Centre for the Study of Living Standards, or CSLS, an Ottawa-based, not-for-profit economic research organization I founded in 1995. The focus of our research is the living standards of Canadians and, in particular, trends in productivity, the labour market and economic well-being. Our flagship publication is the peer-reviewed journal the International Productivity Monitor, co-published with the U.K. Productivity Institute at the University of Manchester.
In my opening remarks, I will make speak about five areas: inflation, the labour market, potential growth, productivity and well-being. I can elaborate on these remarks during the discussion. I think my presentation complements well the presentation by Mr. Kavcic because I’m looking at the longer term and he focused particularly on the shorter term.
Inflation is a major problem for the Canadian economy. It needs to be brought back to the 1 to 3% range within a reasonable period. Yet I am cautiously optimistic on this front. I’ll give a number of reasons for this.
The year-over-year headline rate of inflation has fallen from 8.1% in June to 6.9% in September. The year-over-year measure of inflation reflects what happened to prices 12 months ago, and as large past increases fall out, the rate of inflation subsides. Recent month-to-month rates of inflation are much lower than the overall year-over-year rates.
With higher interest rates, weaker demand is putting downward pressure on price increases. It is unlikely that energy prices will continue to increase, and housing prices are falling.
Yet inflation is a problem because it results in falling living standards of living and real incomes, as we talked about in the last session. This happens when the rate of increase in wages and other sources of income is behind that of consumer prices, which has happened in the Canadian economy in 2022.
What is important is that the living standards of Canadians at the bottom of the income distribution be protected. I was pleased to see that recent federal government policies have focused somewhat on this.
The risk with the current high inflation is that inflationary expectations will be ratcheted up based on these rates of increase and become entrenched in wage demands and price behaviour, leading to an upward wage-price spiral. I would argue the evidence is still out on whether this is actually happening in the Canadian economy. We can discuss that during the question period.
The labour market is the success story of the Canadian economy in recent years. Back in the 1960s, the Economic Council of Canada defined “full employment” as a situation where the number of job vacancies equalled the number of unemployed. Mr. Kavcic mentioned this in his remarks. According to this definition, we actually are at full employment in Canada with the 1 million job vacancies in this country compared to the 1 million unemployed.
This is a wonderful situation for an economy to be in, as the societal benefits of full employment are many. For example, there is no loss of potential output due to underutilized labour. There is more employment income for the population, reducing poverty. The level of happiness and quality of life of a person with a job is much greater than an unemployed person, especially the long-term unemployed. Workers, especially those in the bottom of the wage distribution, have greater bargaining power and can obtain real wages, allowing median wages to progress with labour productivity, which should be the goal of the Canadian economy. Everyone should progress at the overall rate of productivity growth. Finally, government revenues benefit enormously from a fully employed economy, as we have recently seen in Ontario and at the federal level.
A top priority for the Canadian economy is to maintain this situation of full employment or maximum employment. Indeed, this was recognized in the agreement between the Department of Finance Canada and the Bank of Canada in December 2021 with the renewal of the inflation target.
I want to mention that labour shortages, which can characterize a situation of full employment, are often considered the equivalent, or the other side of the coin, of job shortages, or unemployment. In my view, a lack of jobs is a much greater social evil than a shortage of workers. Unemployment results in a loss of potential output for the economy that will never be regained. A labour shortage means fewer sales and less profit for an employer, but that is not a wasted resource.
Turning to the third part of my presentation, I want to talk about the potential economic growth of the Canadian economy. The potential growth rate of an economy is determined by the potential labour supply, which is both the number of potential workers and the average hours workers wish to work and potential or trend in labour productivity growth, which is defined as output per hour.
In 2021, the CSLS published a report on potential growth for the Canadian economy. This is a long-term concept. For the 2018-42 period, economic growth was projected at 1.7% per year. Of that, 1.0% comes from labour productivity growth and 0.7% comes from labour input. Labour supply growth is largely immigration now in Canada, not due to natural increase. A key priority for government policy must be to enhance the potential growth of the Canadian economy.
Turning now to productivity, productivity growth is the only sustainable source of increases in the standard of living of Canadians. Aggregate labour productivity growth in Canada since 2000 has been around 1% a year. In the three decades after World War II, it averaged 3% a year. It takes 70 years for living standards to double if we’re growing at 1% a year in terms of labour productivity, and at 3% it takes 23 years. Obviously living standards are advancing now at a much slower rate than in the past.
Why are we having slower productivity growth now than we did in the immediate post-war period? I would argue that productivity growth is largely driven by technology, so our current weak labour productivity growth suggests the pace of technological change is less now than in the golden age of growth during the third quarter of the 20th century, despite the Digital Revolution. I would be happy to follow this up in the question period.
The economic policy environment in Canada is already largely favourable to productivity growth. We are a very market-orientated economy. It is very unlikely that changes in public policy in this country could boost annual labour productivity growth from, say, 1% to 2%. That would be a massive change. Yet we must continue to strive to identify and implement policies that are productivity-enhancing.
I’ll conclude with some brief comments about economic well-being. A focus on GDP growth can lead to neglect of what is more important for Canadians than GDP, namely, their economic well-being. Indeed, the Bank of Canada states that its objective is to maximize economic well-being, not GDP.
At the Centre for the Study of Living Standards, we argue that there are four dimensions of economic well-being: consumption, stocks of wealth, inequality and economic security. We have developed the Index of Economic Well-being for Canada, the provinces and OECD countries that tracks the progress of economic well-being. I would be happy to elaborate on this during the question period.
I will stop there, Mr. Chairman.
The Deputy Chair: Thank you very much, Mr. Sharpe. I want to apologize upfront. I neglected to thank you for your understanding a week ago when we suddenly had to cancel our meeting because of a decision to have us all take a two-hour dinner break when we were not allowed to sit as a committee. Thank you for your understanding and for coming back this week. It is very important that we hear from you.
We will start our questions with Senator Loffreda.
Senator Loffreda: Thank you, Mr. Sharpe, for being here.
You are a labour market expert. I read your recent publication in August 2020 explaining the rise in profit share in Canada and labour’s weakened bargaining power. You mentioned three reasons: globalization, technological changes and declining union density. Where do you see the effect on post-pandemic globalization, on labour markets, and on a possible recession or eventually a recovery? Do you see globalization as still being as large a factor as it was pre-pandemic?
Mr. Sharpe: Again, there was a large increase in globalization before the pandemic. I think we will now see stabilization, if not decline. We talk about reshoring, for example, moving production back to North America from abroad. I don’t think the effects are going to be massive, but on the margin, that is definitely going to happen. I don’t think there will be greater globalization going forward as there was in the past. That will put less downward pressure on wages. We will be moving fewer jobs from Canada to Mexico or China. I think that will be a favourable factor in the bargaining power of workers.
One reason why there has been this decline in real wages for many years is globalization, the China price, jobs moving offshore to producers were the cost of labour was a lot less. Remember that in those countries, there have been large increases in wages, so there would be less potential for globalization to have negative effects on workers in the developed economies and in Canada. That is what I argue there. I don’t think this is as much of a threat to workers as it was in the past.
You pointed out bargaining power, and that is a key factor. In the study you mentioned, we showed that the key is we want workers to get the benefits of productivity growth.
You can look at two measures of workers. One is the average wage, and that includes all the people at the top, or you can look at the median wage, and that’s the wage of the worker in the middle. We show that the average wage was increasing a lot faster than the median wage in Canada over the last, say, 40 years because of increased wages at the top. CEO compensation is the obvious example, the top 1%. Skilled workers and workers with high levels of education have done better than workers with limited education.
What is interesting is that, over time, that has basically fallen off. The bargaining power in the 2010s was much better than it was in the 1980s or 1990s or even in the 2000s. This gap between productivity growth and median wages has actually fallen a lot. It’s still there. Workers are still, in a sense, not getting their fair share, but that gap declined a lot in the 2010s. I think that, going forward, it will decline even further because we have low unemployment, which is very positive for workers. I think this is an overall positive situation for society.
Senator Loffreda: And the impact on a possible recession and eventual recovery?
Mr. Sharpe: Again, I take a longer-term perspective. We’re going to have a recession, probably very high, but we don’t really focus on short-term conjuncture. We focus more on what is going to happen in 20 or 30 years. If we do have a recession, there will be a recovery; I’ll guarantee you that. Hopefully, we can get back on trend. We’ll lose some output in the short to medium term during that recession, but hopefully we can gain it back by going above trend in the future. Definitely, recessions are bad and they can reduce potential growth. That’s definitely true, and we want to minimize the effect of recessions. We take a longer-term view. What matters in the long run are long-term forces like productivity growth. That is not a cyclical factor. Productivity varies with the cycle, but we look at the long-term effect of productivity.
Senator Loffreda: Thank you.
The Deputy Chair: Mr. Sharpe, I wonder if I can add one small question to the train of thought that you’re on.
When you look at the amount of business investment that is causing productivity growth in the United States, business investment per worker in the U.S. is about four times what it is in Canada, according to the C. D. Howe Institute and their recent work in that regard.
Mr. Sharpe: Four times the level or the rate of growth?
The Deputy Chair: Four times the level on a per worker basis.
Mr. Sharpe: I would dispute that number. It’s definitely higher. It might be half as high, but I think four times — there are a lot of technical issues that would go into that in terms of what you do for the purchasing power parity of investment in the two countries. I have certainly seen those studies and I have seen a gap of double, but not four times.
Obviously, we want more investment. Investment is crucial for productivity to advance. You can argue that we do maybe under-invest compared to other countries, and we definitely should be doing more. However, it’s not as though that is a dire situation. Our investment has been positive in many areas. We can always do better. For example, I mentioned our weak productivity growth in Canada. It is not as though all of a sudden our investment has fallen off and we went from 3% productivity growth to 1%. That wasn’t caused by a fall in investment. Investment is important, but it is certainly not the total story when you want to explain differences in productivity.
The Deputy Chair: I think that as the meeting goes on, we are going to want to hear your productivity growth policy proposals.
[Translation]
Senator Bellemare: Thank you very much. First of all, I would like to thank Andrew Sharpe for being with us. We are from the same school, in the sense that we have known each other for a long time since we met at university. We had the same teachers.
[English]
I know that you are focused on the long-term trends of productivity and well-being. However, before COVID, we were in a situation that I would say was a golden path. Price stability was there, we were getting to full employment and productivity was growing. Then we had COVID and we had an abrupt interruption. Then we had inflation, and we have monetary policy that has been the tool, but it’s a tool that is very general. It is, like I used to say, chemotherapy for localized cancer, and there is a danger that it kills the patient. How will we be able to remain at full employment, keep productivity growing and address the issue of climate change that is coming, that is here, at the same time? Because if we forget about that, the climate won’t forget us. I happen to have experienced some of it. What are your thoughts?
Mr. Sharpe: That’s quite an agenda: climate change, productivity.
On the inflation question, obviously the Bank of Canada has to go easy on raising interest rates. I think it has to take seriously this issue of a wage-price spiral. Wages are finally catching up. It’s normal that wages go up, and they should. We want to see wages higher. But we really don’t want to be living with 6 or 7% inflation. I think we have to try to get it back down. It was positive for the Canadian economy to have stable inflation for many decades. I’d like to think we could get back to that stable inflation. That should be a goal. I think that the Bank of Canada has to be very cautious in its increases in interest rates. We already know that there will be an increase tomorrow, and maybe after that there will be a small one. As was said by the Bank of Montreal, hopefully after a 1 percentage point interest, it will be stabilized there.
Remember that interest rates of, say, 4% are still not particularly high in real terms because inflation will be maybe 3%. Remember that in the 1980s and 1990s real interest rates were 6% or 7%. It was a horrible situation for the government in terms of its debt. Now the interest rates are much lower. We are not at all in the crisis situation regarding interest rates that we had back in the 1980s and 1990s.
I like to think productivity will take care of itself. Who is responsible for productivity? It is the business sector. If they have the right incentives for investment where they can make money and invest, they will do it. We need the right framework. As I already mentioned, the framework for productivity growth in Canada is positive overall. Overall, we’re a market-oriented society, and that is positive for productivity.
With climate change, there is the question of the carbon tax. We think it is positive. There are all sorts of regulatory policies that are needed to reduce emissions in various areas. It’s not an area we’ve done a lot of research on, so I can’t provide you with an agenda for that, but there are many people better qualified than I am to speak about the goal of net zero by 2050. I like to think that that is a serious objective for the government and the policies. I think the market-oriented approach, combined with regulations, will be the way forward for climate change.
Senator Bellemare: So you are quite optimistic, and you don’t think the interest rate will go higher than 4.5%.
Mr. Sharpe: Again, who knows? It depends on the reaction, if we see inflation coming down continually, and it already has, and there are indications there, as I mentioned in my remarks. The month-to-month inflation and quarter-to-quarter inflation are well below 6% now, and we have already had the increases in the oil prices. Housing is on a downward trend. Obviously, if wages all of a sudden peak up to 8%, then that would be an effect.
Senator Bellemare: But you don’t see that the aggregate policy has to completely shape the situation of full employment?
Mr. Sharpe: I’m hoping not. Maybe I’m naive in that regard. I think we could live with an economy that has 4% to 5% interest rates for a short period of time, given that they are not that high in real terms and given they should have been increased a bit sooner in the past. In that sense, I’m fairly positive. There will be a slight downturn, definitely, but I hope we can get back to our potential growth. That’s the key question, as I said. Let’s move that from 1.7% to 2%. That should be our objective.
Senator Bellemare: A sustainable goal.
Mr. Sharpe: Absolutely.
Senator Woo: Thank you, Mr. Sharpe. This has been very interesting.
This is a perfect segue because I want to ask you about trend growth and how we can increase it. There are two component parts that you identified: 1% from productivity growth and 0.7% from labour supply. First of all, what is the implicit immigration number that is built into the 0.7% cent increase in labour supply? Is it the current 300,000 to 400,000 a year?
Mr. Sharpe: We like to use official numbers, so we used the official population forecasts of Statistics Canada when we did this projection. I think they date from 2019. Since then, the government has increased its immigration targets. Statistics Canada has not done a new forecast that puts those in, but I think that would increase the overall population growth probably between 0.2 and 0.3 percentage points. If we are able to attract over 400,000 immigrants a year, that will have a significant effect on our supply and, therefore, increase our potential. It doesn’t help our productivity, but it helps our growth, absolutely.
Senator Woo: So the 0.7% is historical.
Mr. Sharpe: It is based on 250 or so. It is not historical because there has always been an increase in the target, but it never hit 400,000.
Senator Woo: The point is that if in fact the government follows through on its ambition to have 400,000, we could be looking at a higher potential trend growth.
Mr. Sharpe: Absolutely.
Senator Woo: That one is easy to sort out.
On productivity growth at 1%, you are a little pessimistic. You seem to imply we are at a technological frontier. There is not a lot of ability to push that out.
Mr. Sharpe: No, we’re continuing to push it out, but just at 1%.
Senator Woo: You talked about how we are starting to see a trend of productivity gains being shared with labour more so than in the past, and there is a theory that increasing wages is a way to increase productivity because of substitution effects and so on. It is not very popular in the business community. Do you have a view about that and whether we have room to use that kind of strategy to raise that 1% figure?
Mr. Sharpe: First off, you are right. There is an incentive. If labour costs go up, employers have incentives to substitute machinery for workers. That is happening all the time because we are always seeing the rate of capital labour rates going up. Employers are always adding new machinery at a faster pace than they’re adding new workers. I don’t know if that’s the most effective policy to increase productivity. We don’t want to all of a sudden increase wages by 4% and say we’re doing that to raise productivity. That could throw people out of work. If the market does it, that’s great, but I wouldn’t as public policy start having the government say, “We are going to raise wages for everyone to have a productivity gain.” Hopefully, that will take care of itself. That is a positive feature of a strong economy. You get greater real wage growth, and there is more incentive for employers to substitute capital for labour.
Now, the caveat there is that we are talking about labour productivity, but another measure of productivity that Statistics Canada produces is called “multifactor,” or total factor productivity, which takes into account the capital as well as the labour. Because of the increase in the capital labour ratio, that total factor productivity advances at a slower pace than labour productivity. Instead of 1%, it has been growing at let’s say 0.5% over the last 20 years. So these are two measures of productivity.
Strong wages are a positive effect on productivity, but I don’t think it is the most important thing. Technology is much more important.
Senator Woo: And you think the market takes care of itself?
Mr. Sharpe: I think so. I don’t think you would have government policy to say, “You’re going to have to raise wages by this much.”
Senator Woo: Is it government policy to induce greater investment in technology, or is it the market?
Mr. Sharpe: Both. The market has a major incentive to innovate and to adopt the most productive techniques. That is really the key.
The Deputy Chair: Mr. Sharpe, I want to correct myself. Overall business investment in the United States per worker is double that of Canada, but IP investment per worker is four times in the United States what it is in Canada. I want to clarify that, and it fits with what you were just speaking about. The future of the economy is IP investment.
Senator Gignac: It is nice to see you again, Andrew.
Since your federal finance minister consults you on a regular basis before their budget or fiscal update, what is your advice to address this productivity gap compared to the U.S.?
As a second question, in this transition climate, if we want to reach net zero by 2050, do you believe that pension funds in Canada, which are huge, could play a role?
Mr. Sharpe: The Canada-U.S. labour productivity gap has been a topic we’ve addressed for many decades; we haven’t solved it yet. In the business sector, we are around 75% of the U.S. It used to be higher. At one point, it was up around 90%, but then it has come down.
How do we do that? Obviously, we have to have higher productivity growth than the U.S., but how do we get higher productivity growth? Obviously, there is an investment problem, as it was pointed out. We do have lower investment per worker, both IP investment and total investment. It would be nice if we could close that gap. But in terms of human capital, we still have a lot of areas where we could do much better.
The U.S., though, is the world leader in technology. It is unlikely that we are going to ever achieve the U.S. because they have the economies of scale. They are a much bigger economy. They have the leading research universities in the world. They are the heart of technological advances. They have Silicon Valley. That gives them an advantage, so it is unlikely we will ever completely close that productivity gap. But the policies are in improving investment, the human capital, and, of course, competition is another factor which is important. In many markets, we are less competitive than our American counterparts, so improved competition can have a positive effect on productivity.
I don’t think that’s not going to turn around overnight. As I said in my remarks, it’s very hard for government to move the needle on productivity. You have to affect business behaviour, and business already has incentive to do the things it does. The government probably could not really close that gap through policies over the next 10 years. If something happens and there is a big boom in the Canadian economy, that could maybe close the gap much more than the government-type policy.
Senator Gignac: You do not propose that the federal government would, with further incentive on companies —
Mr. Sharpe: It depends on incentives in certain areas. We have been looking at these issues for the past four decades. Smart people at Finance Canada, where I used to work, have been looking at that. They haven’t come up with it yet. I don’t know if they will come up with it tomorrow. I’m a little pessimistic that policies can solve the fundamental structural problems of productivity gaps in our economy.
Senator Yussuff: Thank you, Mr. Sharpe, for being here.
Obviously, being a total optimist and total pessimist depends on what side of the coin you are looking at. We’re sitting around the Senate, and we are not exactly youthful here. We are a little bit older. The demographic trend suggests that, for the first time in history of our country, we are getting a bit older. That is going to present some additional challenges to our country going forward. More people are retiring.
We also have some good public policy that is going to impact future generations of Canadians. For the first time, we have a national child-care policy. We have seen the impact of that on the Quebec economy and women’s participation in the economy. Now we are going to see what that will bring to the rest of the country in terms of women’s participation.
At the same time, in all the things you have addressed in trying to deal with some of the structural factors that are impacting the economy, one area you haven’t talked about — this is OECD data — is that we haven’t invested a lot in terms of trying to bring workers’ skills up to the level compared to other countries. One of the ways to close the gap, obviously, is machinery and equipment, but what about the area of skills? When you look at our skills investment by employers in this country, it’s pretty poor. This is an area where we don’t get a lot of public attention as to what we can do to help Canadians achieve the skills given the job market or changing on a constant basis. How do we help Canadians, especially the younger workforce and new immigrants coming to the country that want to participate? They are very skillful in their own country, yet we don’t let them work in the areas they are qualified to work in their country to work in Canada.
Do you have any comments as to how we can address this issue? I’m not getting into the union density issue that obviously has been a challenge for the country. Maybe you can address that for me.
Mr. Sharpe: Absolutely. We have done very well in terms of post-secondary education. We have one of the highest levels of shares of the labour force that has post-secondary education in the OECD. That’s largely because of our colleges, both the CEGEPs in Quebec and also our community colleges in the rest of the country. That’s a strength of the Canadian economy.
You’re absolutely right. In terms of the workplace training provided by Canadian employers, it seems to provide much less training per worker than employers in other countries. Whether that’s because they can get people that are well qualified from the community colleges so they don’t need to train them, I’m not sure. We definitely could improve our training. How do we do that? You would think that employers would have an incentive to provide additional training for their employees, but they seem not to because sometimes they fear poaching. If they train someone, they will be poached by another firm. That’s often given as a problem.
What is the policy solution to that? It’s not easy, because Quebec has had a tax on employers, 1% tax, in terms of training. That hasn’t moved the needle very much in Quebec, it appears, on employer training there. I think it’s really hard to get the employers.
I have been very involved in this area for many years. There used to be the sector councils that were developed in the 1980s, like CSTEC for steel. The federal government funded 25 business labour industry groups to focus on this training issue. Quebec has also done a lot in this area as well. We have been focusing on training for decades in Canada, and we haven’t been particularly successful. The federal government has not supported the sector councils as they did in the past, so it’s a real problem in training.
We have been doing a lot of work on this for decades at the federal government level, and there’s still more work to be done. I don’t have an easy answer. One would like to think that an employer has incentive to make sure his employees are well trained. Again, as you point out, the data shows that we’re doing less than any other countries.
Senator Yussuff: On the national child-care policy, what is the measurement that you have looked at to see how it’s going to help the GDP of the country and also women’s participation in the economy in general?
Mr. Sharpe: We have seen evidence in Quebec where it has had a positive effect on female labour force participation. That has helped economic growth and tax revenues as well. Pierre Fortin has been an advocate of that. He is speaking to you later this month. He’ll certainly be able to comment on that in more detail than I can. I think it’s a positive effect. It’s going to take quite a few years to come into effect. The effect will be to increase the female participation rate, and that will have a positive effect on labour force growth and potential growth in the economy. The effect will be pretty small, probably 0.1 to 0.2 maximum percentage points. It’s not as if it will all of a sudden boost potential growth massively in the Canadian economy. It is very positive, but it will not have a massive effect. It’s a good social policy, though.
Senator Marshall: Thank you, Mr. Sharpe, for being here.
When you were talking about inflation in your opening remarks, you mentioned that because of inflation, we’re experiencing a falling standard of living. Is that something that you chart over the long term? Is that something that you can say conclusively over the last decade our standard of living has declined or improved, even compared to other countries? The impression I’m getting is we are falling behind.
Mr. Sharpe: Absolutely right. That’s something very much close to our mandate. I can talk for many minutes on that.
There are many different measures of standard of living. Obviously, the results depend on the metric. A standard measure of standard of living is GDP per capita. There are a lot of problems with GDP, but that’s the standard measure. We look at how we have done both in terms of our rate of growth and in terms of our levels with other countries.
We have been falling relative to other countries because the key factor driving GDP per capita is productivity. Our productivity growth has been slower than many other countries. We are still stacked up fairly high. Basically, in terms of the level of our standard of living, we’re probably in the upper third of the OECD countries, but we’re not in the top quarter. There are many European countries in particular that have a higher standard of living than we do. That’s because our rate of growth in standard of living has been relatively weak in recent years.
There is a problem with GDP. Often people look at personal income, and then say, well, we want to look at only disposable personal income after tax. Those are other ways of looking at it. They show a slightly better performance than GDP for a variety of technical reasons. Even there, our rate of growth and standard of living has slowed. The key point is, though, it’s still positive. It’s not as if the standard of living obtained is declining according to these measures. It can for certain periods, and it can as it did in 2022. It will decline because inflation is so high. In recent years, there have been positive gains in our standard of living. Over time, the standard of living rate of change approaches that of labour productivity, so around 1%. In fact, over the last 20 years, our standard of living of GDP per capita has been advancing about 1% a year.
Senator Marshall: When you’re looking back and doing your comparisons, was it 20 years ago that we seemed to taper off?
Mr. Sharpe: As I said, there were two phases of tapering off. In the immediate post-war period from 1945-73, often called the Golden Age of Capitalism, we did really well with our standard of living because our productivity growth was so high. It was around 3% a year. Then we had an oil shock in 1973 and productivity growth fell and didn’t pick up and so on. Then we had the IT revolution which boosted productivity in the second half of the 1990s. Between 1973 and 2000, which was a key year, it was probably 1.5% per year. Then, since 2000, it’s fallen off again a little bit because productivity has fallen off, despite the IT revolution. It’s around 1% a year. We’re on a positive path upward. It’s just the pace is slowing down on our standard of living.
Senator Marshall: What countries are surging ahead of us?
Mr. Sharpe: In terms of growth rates or levels?
Senator Marshall: I’d say growth rates.
Mr. Sharpe: Well, in the developing world, the big surge, of course, was China, because until its recent slowdown, it had productivity growth of around 7% or 8% a year. Its standard of living used to be, say, 10% of Canada. Now it’s probably around 40% of Canada. India has also picked up a lot. So the developing countries, again, they have great potential for growth because their technologies are inferior to ours. They are adopting western technologies, and that gives them a boost in terms of productivity growth.
Senator Marshall: The impression I get is that countries like even Australia are surging ahead of us.
Mr. Sharpe: Right. That’s a good point. In many ways, Australia and Canada are twins. We’re so similar on so many fronts. We have done some studies on that. Overall, I would say we slightly outperformed them in the immediate post-war period, but they have picked up in recent years. I would say that they are outperforming us now. We have declined relative to the Australian standard of living. We used to be slightly higher than them, and now we are actually slightly lower than them. They are a really good country to model for Canada’s practices.
Senator Marshall: That’s interesting. Thank you.
Senator Ringuette: I would like you to comment on the following: Our committee has observed that, in the last two decades, our Canadian businesses are not really investing in productivity, whether it is machine capital or human capital, and they have reserves. Now we have the Bank of Canada increasing the interest rate, creating some kind of incentive to keep those reserves and cash in on these new interest rates. If there is no investment and no increase in productivity, then there is relatively no increase in supply nationally, because our earlier witness says that now inflation is basically national in cause. How do we stop this cycle? How do we get the business community to take their reserves and make the proper investments for the future of their business and the future generations of Canadians?
Mr. Sharpe: Thank you for your question.
It’s not as if investment in the Canadian economy has vanished. If you look at investment as a share of GDP in nominal terms, which is probably the appropriate way, there hasn’t been a massive decline in investment in Canada. Now, obviously it depends on what investment you’re looking at. If you’re looking at residential, it has been quite strong. That’s declining now. But then if you look at, say, non-residential, then you look at the structures, for example, we did extremely well in structures, such as all the oil sands. There was massive investment in the oil sands. Maybe that wasn’t good from a planet point of view, but we did have very strong investment. We now have investment in alternative energy sources, such as wind energy, solar and hydro. We have had big investment. There has been lots of investment in the Canadian economy. We can argue about —
Senator Ringuette: Maybe I should have specified manufacturing.
Mr. Sharpe: Oh, manufacturing. Okay. Even in manufacturing, there has been investment.
Now, are firms holding a lot of resources in cash that they could invest? I’m sure that’s the case in certain areas. The banks, for example, have a lot of reserves. We see that Royal Bank has $10 million it can use to buy HSBC. Definitely many corporations do have excess reserves that they can deploy. They could perhaps give it to their shareholders as dividends or do a takeover or invest in technology themselves. I think it would be positive if more of them invested internally in the latest technologies, because we have had a big gap in the level of ICT investment, and that includes software per worker compared to the United States. Although, supposedly, we have some of the best technologies in Canada in many areas, the official data shows there is a gap there in that type of investment.
How do you get employers to invest more? Well, I guess it’s their psychology. Investment is linked to what they think the future is. If they feel the future is positive, the animal spirits will be stronger and they will invest. In that sense, having a positive business climate, which I think we do have in Canada because governments overall are favourable to business, that should be positive. But it’s not as if the government can force businesses to invest. They have to want to invest. They have to see the opportunities.
Senator Ringuette: I guess my question was more in line with if you were a manufacturing business and you were sitting on a certain cash reserve, considering the increase in interest rates — when the interest rate was at 1%, they were sitting on those reserves. Do you think that there will be an increased incentive for them to keep sitting on those reserves?
Mr. Sharpe: Again, it depends on the manufacturing sector. Some sectors are more dynamic and have greater potential than other sectors, so it’s very sector-sensitive. But if they see a rate of profit that exceeds what they can get just with their money sitting in the bank, I would like to think they will follow through and invest. They do have an incentive to search out opportunities to make more money for their shareholders.
Senator Bellemare: I want to pursue the skills issue. I know that you have thought about that in the past. In Canada, we have been talking a lot about skills development, but I don’t think we’ve invested a lot collectively. It’s still the responsibility of the individual or the responsibility of the employers, but it’s not a collective goal.
You have talked about Australia and how they are quite similar to us. They have a strategy for skills development based on a national skills framework, and most of the countries in the world now have lifelong learning skills development. There is one country that has a very interesting way to finance that. It’s Singapore. I would like to hear from you on this. Singapore is quite interesting. They have also adopted a national framework, and they have accounts that are like public accounts, and what the people spend is automatically reimbursed. It’s government funded. What do you think about that?
Mr. Sharpe: I don’t really know the Singapore example. I’m not opposed to it. I’d have to see the details. Again, the employer sets aside a certain amount of money for the employee, and the employee can use that. I think that’s a good idea. I think all employers should allocate funds for their employees. Now, whether the state forces them to do a certain amount, that’s a tricky issue.
Just in general, though, as you know, there has been a lot of effort made in Canada in the 1990s and 2000s to improve our training situation with the sector councils and the labour force development boards, as you’re well aware. We have been over these issues for so long, and we have the scars to show it. I guess we haven’t been particularly successful. We have kind of abandoned them in recent years. One reason I think is, in the past, labour has been a really important advocate for more training. Labour was a key factor in the labour force development boards in Canada and in Quebec, and now labour’s role in that area is less. Labour still does training, but the labour density is down. It’s not as important a force in Canadian society as it was in the 1970s. So that might be why there’s less discussion in general about these training issues in Canada.
The Deputy Chair: Colleagues, we have four questioners left. We’re going to try to have two-minute questions and answers.
Senator Woo: Someone who shares your enthusiasm for standard of living as the proper measure for improvement in welfare is Don Wright. He wrote a paper for the Public Policy Forum. Maybe you’re familiar with it. He argues that we should be measuring per capita income rather than aggregate GDP growth, but he goes further to say that if you were taking per capita income seriously as the measure of well-being for Canadians, then we should limit immigration whenever wage rates are not rising in line with inflation. In other words, if there is no real wage growth, cut immigration back. Your view, please.
Mr. Sharpe: I’m positive on immigration for Canada. Greater population growth is positive. We’re a big country. The key is to have immigrants spread out across the country and not all concentrated in Toronto and Vancouver. That is happening. For example, we’re doing a lot of work in Atlantic Canada. They’re increasing the number of immigrants they get significantly.
You’re right. Obviously, we can’t increase the average income per worker by bringing in more people. But I don’t think that’s the overall goal. We want to have a diverse society. We want to increase our potential. Immigrants provide a lot of ideas. They are very entrepreneurial. They are a great force for Canadian society. I would not want to limit immigration just because of the standard of living.
Senator Woo: I’m glad to hear that. Thank you.
Senator Loffreda: You did mention that the labour market was a success story: one million job vacancies for one million unemployed. You said that scarce resources were less of a concern than high unemployment. You made a point, saying that post-secondary education is a huge success story because we’re doing very well. Yet when we look back at one of your media publications in 2016, you had some numbers. Maybe you can elaborate on the recent statistics. PhDs and master’s in low-wage jobs were 8% in 1997, and it climbed to 12% in 2016. First, is it still the case? Second, does it mean we’re still not creating jobs for high-skilled labour in Canada? What could be done to improve those statistics?
Mr. Sharpe: Could you repeat those statistics? I wasn’t sure.
Senator Loffreda: In July of 2016, there was a CBC news article in which you mentioned that people with master’s degrees and PhDs who had low-wage jobs increased from 8% in 1997 to 12% in 2016. That’s what you stated at the time.
Mr. Sharpe: I don’t recall that at all. I’m surprised, because there is a real demand for highly skilled labour — people with masters and PhDs. It obviously depends on the field they are in, but certainly in most fields, people with postgraduate degrees do not have significant problems finding employment compared to people with less education. I would have to check those numbers.
Senator Loffreda: We are creating enough high-skilled jobs?
Mr. Sharpe: Absolutely, yes. The good thing right now is that historically, we created a lot of high school jobs. What is happening with this labour-strong economy — full employment — is that we are creating jobs for people at the bottom. That’s the key message I want to make. Full employment. It brings in people who had problems getting jobs in the past because the employer needs them really badly and wants to train them and make them part of the workforce. I think full employment has a disproportional positive effect on people at the bottom of the labour market. People at the top could always take care of themselves.
Senator Loffreda: Thank you.
Senator Yussuff: I feel guilty asking this question because I think I know the answer. Nevertheless, you’re the witness. Just for the record, I’m going to ask it anyway. My colleagues do that all the time here, so I don’t feel guilty at all.
Union density certainly has been holding, but it hasn’t been increasing. It’s been roughly 29% or 30%, depending on what the measurements are. Despite the fact of the redistribution of income, one of the things that has caused the high standard of living in this country is that workers actually belong to unions. Unions cause a $4.50 advantage. Yet we have seen successive governments somehow come to power and all they want to do is restrict how workers can and get access to union coverage. We have seen the benefit of this not only here but around the world. One of the things European countries always talk about with pride is the fact that they have a higher standard of living, and for the most part, they are highly unionized countries. At the end of the day, when are we going to get over this knee-jerk reaction in thinking that somehow restricting worker access to union density is a bad thing in this country rather than a good thing? It would actually help grow the wealth distribution and equally help grow the Canadian economy because they have more income to spend and do the things we want them to do.
Mr. Sharpe: I concur. I worked at the Canadian Labour Market and Productivity Centre for many years. That was a business labour group. I worked very closely with unions. I think unions are very positive for society in many, many ways. I believe that recently the federal government was looking into the Labour Code and trying to make it easier at least at the federal level, which is unfortunately only about 10% of all workers. It’s easier to organize workers at that level. This is a provincial issue, so the action is really going to be up to the provinces in terms of provincial.
I agree with you. However, you obviously want to have some balance between the interests of business and labour. That varies over time, and certain provinces have a better balance for labour. We have an NDP government in British Columbia, for example. It depends on the dynamics of the political situation in each province. Overall, I think it would be positive in many ways to have a greater union density.
Senator Yussuff: Quebec has had a union density of 40%. They have had the right to join a union and go through a list of things. Successive governments have come and gone without touching the policy because they realize it is helpful for a higher standard of living and a better distribution of wealth in Quebec society.
Mr. Sharpe: Right. There are different attitudes toward unions across provinces. Quebec is more favourable to unions. Unions have played an important role in Quebec history, whereas, say, in Alberta, there may not be as positive an attitude toward unions.
The Deputy Chair: You spoke about Australia as a good comparative nation. The Australian Competition & Consumer Commission has led the push for open banking, consumer data rights and open data. They have shown a lot of leadership in that regard. If we’re going to have an economy that is more innovative, causing more productivity growth, how important is it for us to have innovative government policies leading this change in order to enable a more innovative economy? The Australians certainly are showing leadership.
Mr. Sharpe: Absolutely. I guess it depends on your definition of innovative. Some people might think a policy that is innovative might be against a certain group. To be innovative, you have to get rid of barriers, people have an interest in certain barriers. Overall, if you define innovative as best practice and knowing what the best practice is in terms of doing it — we certainly have many examples in Canada where we have not been best practice. Look at some of our Phoenix payroll systems or ArriveCAN apps. We have not been best practice. If government can be best practice and innovative, that’s obviously a very positive thing for the overall economy.
The Deputy Chair: Thank you very much.
Senator Gignac: I want to talk about the role of immigration. I think that geopolitics has an impact, and Canada now looks very attractive for different reasons. Canadian population growth is 80% by immigration now, which is one of the fastest in the Organisation for Economic Co-operation and Development as we speak. What is the impact not only on GDP — because we know that if labour growth is faster, we grow GDP faster — but on productivity? Is there any way to measure that? Because we attract brains. We have a competition for brains work-wise, and we have great universities. Is it something where we have to be more aggressive and able to keep the students who come — you know what I mean? What is the impact on productivity from immigration?
The Chair: Unfortunately, you only have about 30 seconds to answer.
Mr. Sharpe: I would just say that immigrants are great because they self-select. Who comes to Canada? Well, it’s the people who self-select and are motivated to leave and get ahead. I have employed many immigrants at the centre, and they have all done very well. Students are great because we often attract great students from abroad. Giving them the employment opportunities in Canada is great. A very large number of those students actually stay in Canada, become Canadian citizens and contribute to society. I’m very positive on immigrants for improving not just potential growth but even labour productivity growth. Many of our top entrepreneurs have been immigrants. I look at Atlantic Canada and key entrepreneurs there who are often immigrants, people who have new ideas and come in from abroad. I’m overall very positive on immigration for productivity.
Senator Gignac: You can complete by written answer if you want. Thank you.
The Deputy Chair: That’s right. If with any of your answers you felt cut off, I apologize. Please feel free to send written supplements to the clerk.
Mr. Sharpe, thank you very much for all you do at the Centre for the Study of Living Standards and for your time with us today.
(The committee adjourned.)