BOC Off'l:Canada's Growth To Slow,Watching Productive Capacity

By Yali N'Diaye

     OTTAWA (MNI) - While the Canadian economy has performed "a lot better than

expected" over the last past quarters, its pace of growth should decline "over

the next coming quarters," although it should remain above potential, Deputy

Governor Sylvain Leduc said Tuesday.

     One key element the central bank is watching and tries to better

understand, is the evolution of productive capacity, he said in a speech to the

Sherbrooke Chamber of Commerce in the province of Quebec.

     Leduc made his comments a week after BOC Governor Stephen Poloz said the

evolution of economic capacity was the "first, and most important" issue the

central bank is monitoring.

     Stressing the lower dynamism in the Canadian economy that could lead to a

decrease in innovation and long-term growth, Leduc said the current estimate of

Canada's real GDP potential growth rate of 1.5% was a "significant" drop when

compared to the 3% recorded decades ago.

     Still, Leduc found encouraging signs, especially the fact that despite the

lower dynamism, the Canadian economy has been able to perform sectoral

adjustments in the wake of the oil price shock within the anticipated timeframe.

     "This episode shows that the Canadian economy is still flexible enough to

absorb a major shock," Leduc said.

     Productivity has increased "significantly" since mid-2016, he said, adding

that "the most recent data show that the rate of entry for new firms appears to

have stabilized over the past few quarters."

     In fact, with growth expected to remain above potential despite the

expected slowdown ahead, the rate of entry of new firms should increase while

the rate of exits of businesses should decline in the coming quarters.

     "Moreover, the contribution of new firms to increasing the productive

capacity of the economy could give rise to a virtuous circle of growth," Leduc

said.

     So understanding how such productive capacity evolves is "crucial," said

Leduc, as its increase resulting from new firm creation would allow the economy

to grow faster without creating inflationary pressures.

     "Significant challenges" remain, however, Leduc said, with productivity

still "well below" the U.S.

     Leduc attributed the loss of the Canadian economy's dynamism partly to

global trends, such as population aging, although the latter only explains part

of it. New technologies could also be responsible as their economies of scale

have led in many cases to greater industrial concentration and loss of economic

dynamism.

     "The effects of concentration and declining entry rates on innovation and

productivity are not unequivocal," Leduc said.

     He said a quarter of productivity growth is driven by innovation from new

firms and as a result, gazelles - firms which tend to grow by leaps - "play an

essential role".

     However, the share of such firms has markedly declined since 1997, he said,

which is a source of concern.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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