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Bank of Canada’s monetary policy report offers a more sobering assessment of Canadian economy

By David Crane      

While we can be encouraged by recent gains in employment and growth, this is the wrong time to be complacent. We face fundamental challenges for our economic future and both the Bank of Canada and Finance Canada need to do a much better job of addressing them, and being much more candid with the Canadian people.

Finance Minister Bill Morneau, pictured last week on the Hill. The Monetary Policy Report of the Bank of Canada offers a more sobering assessment of the Canadian economy compared to the minister's fiscal update. However, both project an economy growing at 3.1 per cent this year, slowing to just 1.5-1.6 per cent by 2019. The Hill Times photograph by Andrew Meade
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TORONTO—Compared to the boastful and self-congratulatory messaging in Finance Minister Bill Morneau’s fiscal update, the Monetary Policy Report of the Bank of Canada offers a more sobering assessment of the Canadian economy. However, both project an economy growing at 3.1 per cent this year, slowing to just 1.5-1.6 per cent by 2019.

“We came to office knowing that growing the middle class is how we grow the economy,” Morneau told the House of Commons in presenting his fiscal update. While a debatable proposition, Morneau pledged, “we are doubling down on that strategy—because it is working.”

Canada leads the G7 in growth this year, and is positioned to lead it again next year, Morneau boasted. Not according to the latest World Economic Outlook from the International Monetary Fund, which sees Canada ahead this year but faster growth in the U.S. next year. Perhaps a better measure is real per capita output growth, since that takes into account different rates of population growth. Here both Canada and Germany have the same 1.9 per cent per capita growth this year, but next year Canada is projected to tie for fourth spot in the G7 with Italy and in 2022 to have the lowest per capita growth in the G7.

To be sure, the economy is looking better, at least in the short run, than it did just a few months ago, which is of course good news. And while the Bank of Canada is more cautious than Finance Canada in projecting improved business investment and exports, both are pinning their hopes on these drivers for growth, based on a stronger U.S. economy and Canadian businesses that are approaching production capacity. “Solid growth of foreign demand is expected to support export growth and promote business investment,” the Bank hopes. But the Bank, however, warns there are forces that could blunt such hopes, including U.S. President Donald Trump and his America First crusade.

And while Morneau highlights Canada’s job creation numbers, the Bank notes that “the unemployment rate has continued to fall, but its decline likely overstates the degree of improvement in the labour market.” The long-term unemployment rate remains high, the average hours worked remains low and wage growth continues to be modest.

Nor are there immediate prospects for wage gains. Productivity has been growing faster than wage increases, so that workers are not benefiting from modest productivity improvements. The Bank suggests that wages could be held back by globalization, since companies can relocate activities to lower-wage countries, reducing the bargaining power of workers in Canada. The increased competition from imports could have a similar effect in restraining the growth of wages. And in Alberta, workers who once had high-paying jobs in the oil and gas industry may have moved to lower-paying jobs in other sectors. As the Bank warns, “wage gains remain subdued and are likely to increase only gradually.” Not good news for the middle class.

What’s most troubling with both the Bank and Finance is that they appear focused on the cyclical recovery from the Great Recession rather than on the structural recovery that we really need.

Our chronic current account deficit, that shows we are failing to pay our way in the world, and our weak innovation-driven productivity performance, despite a recent uptick, which holds back the potential growth of the economy, should both figure much more in discussions of our future economic prospects. Without a new economy, we will not be able to generate the wealth we need to sustain our health care, education and other public investments that are central to our way of life.

What’s missing from both the Bank and Finance Canada is any discussion of the risk of secular stagnation and the possibility that slower growth and weaker productivity may be the new normals. Why are we not making the investments in innovation that we need and why are we unable to pay our way in the world, relying on the sale of Canadian assets to foreigners or growing foreign debt to balance our books? Can we only succeed if oil is US$100 a barrel?

While the Bank expects some pickup in oil and gas investment with oil prices in the US$55 range, and some pickup in business investment by manufacturing and other non-commodity businesses, “uncertainty about U.S. trade policy and structural challenges, including expected low trend labour force and productivity growth in Canada relative to history, are expected to continue to restrain investment growth,” it says.

The appreciation of the Canadian dollar and uncertainty over the future of U.S. protectionism and the outcome of NAFTA negotiations both impact Canadian exports. But it’s more than that.

Overall, “deteriorating competiveness and the relocation of production outside Canada by some multinational firms have contributed to a loss of productive capacity and a reduction in the global market share of Canadian goods exporters,” the Bank says.

The auto industry is a good example as investment focuses on Mexico and the U.S. According to Statistics Canada, after adjusting for inflation, output in the Ontario auto industry was $8.2-billion last year, compared to $10.3 billion in 2005, while output in the auto parts industry was $7.9-billion in 2016, compared to $9.0-billion in 2005. As it warns, “the growth of non-commodity goods exports is expected to remain moderate.”

Household spending is also expected to moderate for a number of reasons including, the Bank says, “an anticipated slowdown in the growth of disposable income.” Household debt levels are already high and as borrowing costs rise, this is likely to dampen spending on housing and durable goods (such as cars).

While we can be encouraged by recent gains in employment and growth, this is the wrong time to be complacent. We face fundamental challenges for our economic future and both the Bank of Canada and Finance Canada need to do a much better job of addressing them—and being much more candid with the Canadian people. That’s what we pay them to do.

David Crane can be reached at crane@interlog.com.

The Hill Times 

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