Bank of Canada Governor Stephen Poloz’s story of the Canadian economy has been sent to rewrite. There are no sleeping beauties in the revised tale: if the factory in your community closed during the Great Recession, it is likely staying closed. (Although if it has exposed brick, some hipsters might come along and turn it into shared workspace.) If there was a Prince Charming who thought he could make money doing whatever that facility used to do, he probably would have shown up by now. It is time to move on.
Poloz, who, like every other economist, has struggled to explain our post-crisis reality, was in Toronto on November 28 to set the stage for the Bank of Canada’s last scheduled policy announcement of the year, on December 7. The governor went on television with Bloomberg’s Amanda Lang, he spoke at an event hosted by the C.D. Howe Institute, and he held a press conference. Poloz used these venues to tweak his narrative. When he was appointed three years ago, Poloz assumed non-energy exports and business investment would take over from household spending and housing as drivers of economic growth. That hasn’t happened to the extent the central bank thought it would. Officials have spent a lot of time this year trying to understand why their assumptions were off. It appears Canada suffered from a lack of champions; companies and entrepreneurs with the combination of guts and capital to make it in a tougher global economy. But if Poloz is right, the wait may be over. Canada’s heroes have arrived.
Poloz said through Lang that if anyone is using a “sleeping-beauty model” to think about exports, then they are misguided. Many of Canada’s exporters already were struggling to keep up and the financial crisis finished them off. That event wiped out billions of dollars worth of manufacturing potential. (in his speech,Poloz put the figure at $30 billion.) Think of it this way: if Canada’s manufacturing industry was once a full-sized pickup, it now is a a compact SUV.
Stéfane Marion, chief economist at National Bank Financial, noted earlier this month Canadian factories currently are using 82% of their production capacity, a historically strong number that is seven percentage points higher than the corresponding capacity-utilization rate in the United States. Canada’s manufacturers should be investing in new machines and building additions to their factories. But they aren’t. Statistics Canada reported on November 18 that the value of the capital stock in manufacturing was essentially unchanged in 2015 from 2014. (Ontario remained in free fall, as the value of the province’s capital stock in manufacturing dropped to its lowest point in 41 years, according to Marion.) Weaker global demand is an insufficient explanation for the lack of investment. The value of American manufacturing capital has surged in recent years, so there must be opportunity out there somewhere. “Clearly, currency depreciation alone is no panacea for a quick revival of Canada’s manufacturing heartland,” Marion said in a research note. “New policies from both provincial and federal governments are required to improve competitiveness and make Central Canada the manufacturing engine it once was.”
Poloz may agree with Marion’s assessment. He told Lang that Prime Minister Justin Trudeau should pursue new free-trade agreements. In the meantime, it is reasonable to expect the Bank of Canada to favour an interest-rate setting that keeps downward pressure on the value of the currency. That is because the central bank has identified a new Prince Charming. Poloz’s narrative now stars the services industry, and in particular information technology (IT) and tourism. The central bank surveyed a group of IT companies and found they were more confident than the average Canadian company, probably because most of them were reporting sales growth in the double digits. Tourism spending has been rising steadily for more than two years.)
The central bank governor reckons Canada has a comparative advantage in services. “We have the necessary ingredients: a highly educated labour force supported by strong universities and colleges; entrepreneurs with access to business incubators; a beautiful and interesting country that many would like to visit; a multicultural workforce that helps us to serve domestic and international markets,” he said in his speech. That advantage is enhanced by a depressed currency. The weaker dollar isn’t an unambiguous gain for a Canadian company that wants to make things. Modern manufacturing requires buying robots and other expensive equipment and building facilities overseas, so Canada’s exchange rate makes expansion harder for some companies. But for IT firms, consultancies, and tour guides, the exchange rate is a windfall. Said Poloz: “That comparative advantage has been strengthened by the decline in the Canadian dollar in the past couple of years—a symptom of falling resource prices, and a facilitator of the rotation of growth from resource production to other sectors.”
There are reasons to resist organizing economic policy around services. Theoretically, lawyers, coders, engineers and bankers should be able to support a strong economy, but they tend not to in practice. And the U.S. election just has demonstrated what happens to societies that lack rewarding jobs for those without fancy degrees. Poloz used his speech to challenge the old cliché of Canadians as “hewers of wood and drawers of water.” (He titled his talk, “From Hewers of Wood to Hewers of Code: Canada’s Expanding Service Economy.”) Yet the counter-narrative—the fact that most Canadians have been employed as service providers for decades—is also a cliché. Not all jobs are created equal. Benjamin Tal, an economist at CIBC World Markets, published a report this week that suggests the overall quality of employment in Canada has deteriorated since the late 1990s. Among his findings was the percentage of jobs that pay below the Canadian average has increased to 61% from about 58% in 1997. “The decline in employment quality over the past two decades does not mean that we have turned into a nation of ‘hamburger flippers,’” Tal wrote. “Rather, it suggests that the distribution of employment in Canada is not as favourable as it used to be, looking strictly at compensation.”
But maybe the rise of companies such as CGI Group Inc. and Shopify Inc. will change the equation? They and other service-oriented companies currently are doing most of the work in filling the hole in gross domestic product left by the Great Recession. It only makes sense that they would start to receive more the central bank’s attention.
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