MNI POLICY: Text of Bank of Canada Governor Poloz Speech>

     OTTAWA (MNI) - Following is the text of a speech by Bank of Canada 

Governor Stephen Poloz Thursday in Toronto: 

Economic Progress Report: We All Have Work to Do 

Introduction

     Thank you for the invitation to be here today. It is particularly 

fortunate that I am here just before International Women's Day to speak 

with Women in Capital Markets-a group that strives to increase the 

participation of women in the finance industry. This is important, and 

not just because you are promoting more equitable outcomes in the 

sector. It is important because we know that a more diverse and 

inclusive workforce leads to better decision making and stronger 

economic growth. The Bank of Canada actively shares your goals. Back in 

2017, we established the Master's Scholarship Award for Women in 

Economics and Finance. The aim is to attract and advance women in the 

core areas of our work. The recipients receive a cash scholarship, 

mentorship with a Bank economist and a job offer. The seven most recent 

winners were announced last month, along with the winners of Bank 

scholarships for indigenous students and students with disabilities. 

Congratulations to everybody. 

     I am here to explain our decision yesterday to cut interest rates 

by half a percentage point. Not surprisingly, the threat to the global 

economy of COVID-19-the coronavirus-played a central role in our 

deliberations, and we are coordinating actively with other G7 central 

banks and fiscal authorities. People are rightfully concerned about the 

situation, given the human toll the virus is taking and the tragic 

consequences for those affected. At this stage, the disease is only 

partly understood. We will count on our public health authorities to 

give us good advice and contain the situation in due course. 

     The Bank's job is to think about how COVID-19 may affect the 

economy. It has already disrupted the Chinese economy significantly. 

This is having ripple effects everywhere because Chinese producers are 

highly integrated with the rest of the world through supply chains. As 

the virus spreads, that disruption may be repeated in many other 

countries. Of course, travel plans are being cancelled, with obvious 

implications for consumer spending and travel-related business. But 

there may be more persistent economic effects through eroding consumer 

and business confidence. Indeed, Canadian companies, many of whom had 

already been forced to the sidelines by uncertainty over the future of 

NAFTA and the US-China trade war, could retrench further. The Canadian 

economy has demonstrated good resilience in the past couple of years. 

That resilience could be seriously tested by COVID-19, however, 

depending on the severity and duration of its effects. 

     So, before I discuss yesterday's interest rate decision in detail, 

let me spend a few minutes on the foundation of that resilience-Canada's 

strong labour market. Today's labour market The basic story of the 

Canadian labour market is similar to that of a number of other major 

economies. Even though unemployment is low, there is a sense of unease 

among many people. Some worry about being displaced by technology or 

foreign competition, others about finding stable work in the gig 

economy. Still, the numbers clearly show that the Canadian labour market 

is in good health overall. Last year, nearly 300,000 jobs were created 

in Canada. The unemployment rate was below 6 percent throughout 2019, 

near its lowest in more than 40 years. Meanwhile, wage growth has 

increased from around 2 percent to near 3 percent. 

     Importantly, the quality of jobs is also improving. There are a few 

ways to look at job quality. First, job gains have been concentrated in 

full-time work. Second, the share of people working part-time 

involuntarily has shrunk to near the lowest in more than a decade. The 

Bank will publish a comprehensive staff analytical note in the coming 

weeks that looks at a wider range of indicators of earnings, job 

security and work-life balance. It shows that job quality has clearly 

improved in Canada over the past five years. Another sign of labour 

market health is that many people are changing jobs to get a better 

match with their skills and experience-a process economists call churn. 

Nationwide, churn is now at levels last seen more than a decade ago, 

before the global financial crisis. The latest available data show that 

Canadians who change jobs are seeing their wages rise by 12 to 14 

percent. There is little doubt that this job switching is raising 

productivity in the economy, and the latest data do indeed show a rising 

trend in productivity. 

     There is more. It is taking less time on average for unemployed 

people to find jobs. And there are more than half a million job 

vacancies in the economy. This meshes with what I hear from business 

leaders across the country, who say that their biggest challenge is 

finding qualified people to fill existing vacancies. 

     Of course, these are all national statistics, which mask some 

pretty stark regional variations. We are well aware of the difficulties 

facing oil-producing regions, for example. The 50 percent plunge in oil 

prices back in late-2014 contributed to a similar drop in investment 

spending. Combined with ongoing transportation constraints, this boosted 

Alberta's unemployment rate, which was around 4.5 percent before the oil 

price shock, to over 9 percent by late 2016, with young men facing the 

highest unemployment. The latest jobless rate in Alberta is 7.3 percent. 

This tells you that, while the economy is adjusting, it remains a long 

and difficult process. On the other side of the coin, labour markets 

have been quite tight outside of the prairies, according to our Business 

Outlook Survey. And two of the provinces with the strongest economies, 

British Columbia and Quebec, also feature the highest job vacancy rates. 

     Another key measure of labour market health is the participation 

rate. This is the percentage of working-age people who are either 

employed or actively looking for work. A rising participation rate can 

signal that people who dropped out of the labour force earlier are 

returning. This is good for their own prospects and for the country's 

economic potential. Participation rates fell sharply in the wake of the 

global financial crisis and the slow recovery that followed. At the 

time, a major preoccupation for the Bank was the possibility that people 

would be unemployed for so long that their skills would become less 

valuable-a process economists call labour market scarring.  Fortunately, 

labour force participation rates have risen in all age groups. This 

makes the record-low unemployment rates we are seeing doubly impressive, 

especially given the setbacks we have had along the way, such as the 

drop in oil prices. This is not to argue that higher labour force 

participation is always a good thing. For seniors, for example, it could 

mean either that they are happily extending their working lives or that 

they need to work longer because they are not fully prepared for 

retirement.  

     Still, when you look at all the indicators, you can see that the 

labour market has been, and continues to be, a source of resilience for 

the Canadian economy. A solid, secure job is the primary basis for 

consumer confidence and household spending, which is the primary engine 

of growth of any economy. That said, it is also plain to see that there 

is still work to do. Sectoral weakness in the Prairie provinces and in 

Atlantic Canada remains a concern. On another front, Canada's population 

includes several groups that have been chronically underemployed, 

representing significant untapped potential. In particular, the female 

participation rate is still about 8 percentage points less than the male 

rate. And the Indigenous participation rate is well below that of the 

general population. Helping new immigrants enter the workforce is 

another potential growth area. As our workforce ages, we are generating 

barely enough new workers to replace retiring baby boomers, so 

immigration is key to our future economic growth. Looking underneath 

this trend, unemployment rates for immigrants after 5 to 10 years is 

about the same as for the general population. However, in those first 

five years, the unemployment rate of new immigrants is higher than 

average, probably due to barriers around education equivalency. 

     Improving labour market health Given the importance of labour 

market health to our economic resilience, it is natural to ask whether 

there are policies available to strengthen it further. For its part, the 

Bank of Canada's role is to continue with a monetary policy anchored on 

inflation control. By acting in a way to keep inflation on target, we 

help to stabilize economic growth and keep the economy near its 

potential. This in turn means that the economy delivers the most jobs 

and income that it can without creating faster inflation. For example, 

consider the experience of 2015. We knew that the collapse of oil prices 

would lead to a large drop in income and investment for the entire 

economy and cause inflation to head below target. As a consequence, we 

cut interest rates immediately, without waiting for the adverse effects 

to appear. Lower interest rates helped bring inflation closer to target 

and helped the economy as a whole return more quickly to full capacity 

and full employment.  

     This adjustment process sounds very simple in abstract. But behind 

that economic theory we are talking about real people. For those 

directly involved, adjustment can be very difficult and painful. What is 

more, the situation forces individuals to take on all the related risks. 

Consider someone working in the energy sector who lost their job when 

oil prices collapsed. Even if they can find suitable work in another 

province, they may have a spouse who is reluctant to leave a good job 

and children who are settled in their school and community. They may 

need to sell their house, which could be difficult if the local real 

estate market has slowed. Houses in the new location may be more 

expensive or difficult to find. It is not easy to face these risks and 

overcome these barriers. That is why the adjustment process takes a long 

time. In 2015, these adjustments were facilitated by lower interest 

rates and a depreciation of the Canadian dollar. Obviously, more 

targeted labour market policies lie beyond the Bank's purview. Still, it 

makes sense for policymakers to address impediments that make it hard 

for workers to be matched up with those half-million job vacancies. 

There may be new ways of helping people deal with the risks involved in 

relocation, or overcome regional barriers to job matching. For example, 

there may be areas where we could make it easier for skilled workers and 

professionals to recertify to qualify for a job in a different province. 

We may also be able to learn from international experience in terms of 

improving our educational, training and retraining programs. 

     I mentioned earlier that, despite low unemployment, people express 

a sense of dissatisfaction and unease about their future. It is possible 

that the distribution of income is contributing to this. Total labour 

income as a share of the Canadian economy began to trend downward nearly 

30 years ago and has remained in a lower range for the past 10-15 years. 

Opportunities for globalization of supply chains and the steady increase 

in automation technology have no doubt reduced employee bargaining power 

over time, not to mention declining union membership. Bearing in mind 

that globalization and automation also generate economic growth that 

benefits everyone, it is clear that there is no simple solution to this. 

However, it is a useful metric to track when considering alternative 

policy ideas.  

Yesterday's decision 

     All that said, the Canadian labour market has certainly been 

important to the economy's resilience. Its strength has helped support 

the growth in incomes and household consumption that we have seen. 

However, it is just one factor that the Bank's Governing Council looks 

at when we sit down to take our monetary policy decisions. Let me turn 

now to yesterday's announcement. 

     It is important that we put recent developments into proper 

context. Business investment has been falling short of expectations in 

Canada for the past three years. Six months ago, we were seeing signs 

that the US-China trade war was beginning to affect Canadian exports and 

investment even further. In October, we pointed to Canada's two-track 

economy, where soft exports and investment were being offset by a 

recovering housing sector, a strong labour market and solid consumer 

spending. But we were concerned that the effects of the trade war could 

eventually tilt the balance of risks against us. With the economy 

operating very close to its potential, the unemployment rate near 

historic lows and inflation on target, Governing Council judged that the 

risk that growth would slow was not great enough to warrant a cut in 

interest rates. The main reason was that lower interest rates could 

reduce the downside risk to growth but could at the same time increase 

financial vulnerabilities. And this would make it harder to achieve the 

inflation target in the future. 

     In January, the conditions had changed but the reasoning behind our 

decision was similar. Consumer confidence declined in late 2019, but 

there seemed to be a reasonable chance that this would prove temporary. 

Furthermore, there were signs that the global economy was bottoming out, 

and there was a growing consensus that world economic growth would edge 

higher in 2020. Accordingly, we again acknowledged that there were 

downside risks to the Canadian economy. But, with the labour market in a 

very solid situation, we felt that the downside risk was not sufficient 

to warrant lower interest rates. 

     A lot has happened in the past six weeks. In particular, the global 

economy will, at the very least, be significantly disrupted by COVID-19 

in the first half of the year. It is possible that the global economy 

will snap back quickly after health professionals have managed the 

situation and conditions have returned to normal. However, the outbreak 

and its effects could be more persistent. Consumer and business 

confidence could be set back for a longer period of time, causing 

economic growth to slow more persistently. This could include 

longer-term layoffs, for example. At this point, we simply do not know. 

     Of course, the coronavirus is not the only issue on the table. Just 

last week, we received the detailed economic report on the fourth 

quarter of 2019 from Statistics Canada. As expected, this report shows 

that the economy slowed significantly in late 2019. Some of this was due 

to special factors, such as an early winter that left some crops to rot 

in the fields, the Canadian National Railway strike, the shutdown of the 

General Motors plant in Oshawa and so on. Still, economic growth in the 

fourth quarter was lower than 1 percent when you take out the effect of 

the special factors. This is because some of the slowdown was more 

structural-exports remained weak, business investment declined and the 

recovery in housing moderated. The one positive was consumer spending, 

which remained solid even while the savings rate went up further. 

Consumer confidence did rebound in January, as we had hoped. In short, 

the solid labour market we discussed earlier is giving the economy a 

measure of resilience. 

     What about the start of 2020? In addition to the impact of 

COVID-19, there are other factors: the strike by Ontario teachers, 

unusual weather and the rail blockades. We can hope that all of these 

factors prove to be temporary, but it seems that we are headed for at 

least another quarter of very slow economic growth. Since it is already 

March, these factors could easily affect the second quarter. 

     There is a real risk that business and consumer confidence will 

erode further, creating a more persistent slowdown, especially given 

recent declines in stock markets. Furthermore, world prices of 

commodities have dropped by more than 10 percent and oil prices by close 

to 20 percent since the start of the year. Commodity prices are a very 

important channel for transmitting international shocks to the Canadian 

economy. With the oil-producing regions of our economy already stressed, 

this shock can only deepen and prolong the adjustment process discussed 

earlier. And the effects go beyond oil. These stresses will inevitably 

find their way from commodity-producing regions into other parts of the 

country as those who are affected directly spend less money on 

everything. 

     In light of all these developments, the Canadian outlook is clearly 

weaker now than it was in January. When the economy is operating close 

to its potential and inflation is on target, a risk-management approach 

to monetary policy often recommends unchanged policy in the face of a 

small shock. However, risk management demands a prompt and sizable 

policy response to larger shocks to ensure that the economy remains well 

anchored. Governing Council agreed that the downside risks to the 

economy today are more than sufficient to outweigh our continuing 

concern about financial vulnerabilities. 

     Indeed, declining consumer confidence would naturally lead to 

reduced activity in the housing market. In this context, lower interest 

rates will actually help to stabilize the housing market, rather than 

contribute to froth. Further, we expect that the B-20 mortgage lending 

guidelines will continue to improve the quality of the stock of mortgage 

debt. 

     Many of the implications of COVID-19 lie beyond the influence of 

monetary policy and authorities in Canada and around the world are 

focused on addressing the situation. For its part, monetary policy can 

contribute by buffering their effects on consumer and business 

confidence, thereby helping the economy bridge the situation. This 

contribution can be especially powerful when the shock is global and the 

response is coordinated. 

     As the COVID-19 situation evolves, Governing Council stands ready 

to adjust monetary policy further if required to support economic growth 

and keep inflation on target. While markets continue to function well, 

the Bank will continue to ensure that the Canadian financial system has 

sufficient liquidity. And we continue to closely monitor economic and 

financial conditions, in close coordination with other G7 central banks 

and fiscal authorities. 

--MNI Ottawa Bureau, +1-613-314-9647, greg.quinn@marketnews.com

                          ** MNI OTTAWA **

[TOPICS: M$C$$$,MACDS$]