OTTAWA – Canada is missing out on about $40 billion in export sales and could continue to do so for years to come as uncompetitive producers continue to lose market share, Bank of Canada governor Stephen Poloz said Tuesday.
The central banker, who was testifying before the Commons finance committee, said there are several factors for the significant drop-off — including poor productivity and a stronger loonie, as well as the disappearance of about 9,000 exporting firms since the recession.
But the bottom line is that the “wedge” that has opened up in the non-energy export sector is the new reality and is not going away in the near future, he said.
The loss in export capacity has been the principal reason Canada’s economy continues in the slow lane at about two per cent growth, he said, and Canadian firms have been holding back on investments and hiring.
“Make no mistake, this wedge is real and it is big,” he said.
“Right now we have about $35 to $40 billion fewer exports than our models would have predicted at this time (in the global and U.S. economic recoveries).”
That represents almost a month’s worth the country’s merchandise exports.
Poloz, along with outgoing senior deputy governor Tiff Macklem, was testifying before the committee following release of the latest central bank outlook that predicted 2.3 per cent growth this year and 2.5 next. Both will appear before a Senate committee on Wednesday afternoon.
As he has since being appointed governor last summer, Poloz again focused on the troubled Canadian export sector, particularly in the non-resource and manufacturing industries, as the necessary ingredient to push the economy into a self-sustaining growth path. The bank has devoted considerable resources in trying to solve the “puzzle” of why exports in particular have yet to recover from the recession.
As an open economy “our export outlook is crucial,” he said.
In a research paper released last week, the bank found that about 55 per cent of non-energy subsector exporters — in value terms — have performed at historic levels given the current state of the external recovery, but that the remaining subsectors have lost market share and will likely continue to lag.
The governor told the MPs he expects export growth going forward to coincide with the pace of the U.S. economy going forward, but noted that remains a forecast and not yet a reality.
Asked what it would take for him to consider cutting interest rates further, he said a slower than expected recovery in the export sector.
He insisted that the Bank of Canada will make a decision on raising or cutting interest rates independently of what the United States does.
The governor’s testimony ran the gamut of controversial issues debated in the Commons recently, such as job shortages and the impact of government restraint on growth, but Poloz mostly dodged that hot political issue.
He did defend companies that had not aggressively increased spending on new equipment to improve productivity, saying it was “understandable” business has been taking a cautious approach given the turmoil of the last several years.
In general, he said he believes the U.S. economy is starting to fire on most cylinders, with business investment and government spending about to come on stream, which should increase demand for Canada exports.
He said he was not concerned about the U.S. Federal Reserve, the counterpart to the Bank of Canada, continuing to draw down on its quantitative easing program — called tapering — because he said that is occurring as the U.S. economy normalizes.
And he added that he did not believe tapering would diminish asset values.