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Repeats Story Initially Transmitted at 16:49 GMT Oct 3/12:49 EST Oct 3
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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