Business·Analysis

Stephen Poloz gets another chance to offer some friendly guidance: Don Pittis

In 2014, Bank of Canada governor Stephen Poloz offered some wise economic guidance to newly appointed finance minister Joe Oliver. The problems Poloz addressed have not gone away. Don Pittis says maybe Canada's new government will listen now.

Maybe defeated finance minister Joe Oliver should have listened to Bank of Canada governor

When he was first appointed finance minister, Joe Oliver got some sound advice from Bank of Canada governor Stephen Poloz. Perhaps the governor's new political masters will be more inclined to listen. (Reuters)

In March of 2014, the day before Joe Oliver took over as the federal finance minister, Stephen Poloz offered the country a thoughtful speech that worked perfectly well as a recommendation for what the new minister should do in his new job.

Later today, in his first Monetary Policy Report after this week's federal election, the governor of the Bank of Canada will once again have a chance to offer some guidance about the direction of the Canadian and global economy.

Maybe this time, his political audience will be more open to accepting some friendly guidance.

Poloz has never been in a better position to speak frankly. Rightly cautious during the election, the governor has largely kept to technicalities in his speeches and releases. He has not submitted to questions from the media.

Blank slate

Poloz will no longer be under the watchful eye of the prime minister who appointed him. The new Liberal financial ministries of a government under incoming prime minister Justin Trudeau are as yet a blank slate. Poloz has an opportunity to offer his most honest and transparent appraisal of the Canadian economy yet.

Poloz certainly has lots to tell. The problems he foresaw a year ago last March have not gone away and several new ones have have arisen since.
Liberal Leader Justin Trudeau visits a Mississauga retirement home during the recent election campaign. Bank of Canada governor Stephen Poloz has warned that an aging population means a shrinking economy. (Reuters)

Back then, Poloz warned of an aging, shrinking, labour force that would have an increasingly severe impact on the economy.

One way of calculating economic activity, Poloz reminded us, is to multiply productivity per worker times the number of workers.

As the number of active workers declines, therefore so does the economy.   

New immigration could help. But so would better access to daycare, releasing more Canadian-educated women into the workforce. Income splitting, by rewarding underemployed spouses of high-income husbands or wives, could have the opposite effect.

Another impact of an aging workforce is an increase in savings as older workers tuck away nest eggs for what could be a long retirement. 

Some of those savings are going into passive or foreign investments instead of going into the economy as consumption spending. 

Poloz also warned that a combination of high savings rates and cheap borrowing was sending more and more money into real estate, which does even less to add to the productive potential of the economy.

Scarily overpriced

That is a problem that certainly has not gone away. Not only do housing values in Vancouver and Toronto continue to soar far above inflation, but there are also signs the trend is spreading beyond the normal urban radius.

Not only that, but this week there was a new round of international warnings about high levels of Canadian consumer debt, with both Moody's and The Economist magazine weighing in on the danger of a bubble.

The Economist suggested house prices were "scarily overpriced," which might have a bigger effect on Canadians if previous similar warnings had come true.

Just last week, Poloz discussed the difficulty he faced using interest rates to slow house price inflation. In fact, as the late former Conservative finance minister Jim Flaherty recognized when he was in the job, restraining property prices when inflation otherwise remains low should be the job of the government, not the Bank of Canada.

Fresh problems

Those are all old problems that Oliver and the Conservative government never got around to solving. Since last March, there are a new set of problems that Poloz will remind us — and the government — about today.

It was just after Oliver took the job in finance that oil and commodities began to crater. By late summer of that year, a glut of production and a collapse of demand from China had put a squeeze on the most active parts of the Canadian economy. It may be that the full impact of that squeeze is just hitting now. 

Since then, the economy has remained well below capacity. Job creation has been weak. Inflation has remained below the bank's two per cent target. Economic growth has been negative or flat. Hopes of a sharp rebound in the U.S. economy are fading. Emerging markets, saddled by debt, are buying less. There are doubts about an immediate commodities rebound.

If the new Liberal government goes ahead with its election promise to invest in infrastructure spending, if more money were found to pour into aboriginal education, that could suck up the economy's overcapacity, reducing the need for further interest rate cuts.

A young and vigorous cabinet, allowed to use their brains rather than just doing as they're told, may find activist solutions the previous government could not imagine.

The outgoing government was in principle anti-activist. Offered low taxes and left to its own devices, the free market foundered. The economy was shrinking and the rich were enriched. From the government, there seemed to be no plan B.

As a central banker and with his experience as head of Export Development Canada, Poloz knows that government can be economically useful in ways other than just stepping out of the way. Maybe this time, Poloz has government masters who will be more inclined to listen.

Follow Don on Twitter @don_pittis

More analysis by Don Pittis

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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