Q&A: Stephen Poloz on jobs, household debt and the economy

The Bank of Canada governor in conversation with business editor Jason Kirby
Bank of Canada Governor Stephen Poloz speaks during a news conference upon the release of the Monetary Policy Report in Ottawa January 22, 2014. Chris Wattie/Reuters
Ian Waldie/Getty Images
Ian Waldie/Getty Images

As governor since June 2013, Poloz has held the lever of interest rates at a difficult time for the economy. Now, he is cautiously optimistic that stronger growth is taking hold.

What’s your greatest concern about the economy?

My biggest concern remains the issues that are outside of Canada. We’re just a small place in a big world, and it just seems like, every day, something new is happening that has the potential to affect us. I don’t want to sound overly gloomy, but, since you asked what worries me, it’s the international repercussions and how they affect our export sector, which is the backbone of the Canadian economy.

Okay, so what gives you hope?

What gives me hope is that the U.S. economy has done the hard work of resolving things after [the financial] crisis,and that means businesses are starting to invest again. That’s important to us, because investment is a very trade-intensive business, so we supply a lot of that machinery and equipment. So the lower dollar and the return of the U.S. [are] two things working together to give us a much more encouraging outlook.

It’s seemed as though, each time Canada was gaining traction, something bad came along, whether it was bouts of low inflation or weak job growth. Now, it’s oil prices.

Well, oil prices are a pretty big thing for us. Being a net exporter, we are one of the economies that would be a net loser. That reduces the amount of income that’s flowing into Canada, and quite significantly so. At the same time, it will strengthen economies such as the U.S.’s. Even if the exchange rate is offsetting some of it, and the U.S. economy is a bit stronger, there will be a net negative effect for us. We speculate [that] if the prices stayed where they were, [we could lose] perhaps as much as a third of a percentage point [of GDP], but we’ll do harder work on that over the next few weeks and, when we do our next monetary-policy report, there’ll be a lot more detail on it.

Do you see this as a drop in price similar to that of 2008, which was relatively short-lived, or something like we saw in the ’80s and ’90s, i.e., a prolonged slump?

That’s a hard choice to make at this stage. We know the world economy is underperforming, [but] a good percentage of this drop is really due to excess supply. As a consequence, it’s more likely to be longer than what we saw in 2008. But, of course, lower prices usually would mean a little less investment, and it’s like any other economics problem: It kind of catches up to itself. We wouldn’t expect $60 or $70 to be some sort of equilibrium for a long time, because the cost of producing each barrel of oil in many parts of the sector is higher than that.

You’ve talked about Canada’s two-track economy, that one track has been driven by the resource boom. Might lower oil prices mean the Canadian economy might have to switch tracks? And it is that second track, the manufacturing-driven, export-driven economy, ready to pick up the slack?

Well, your supposition is correct, presuming it lasts long enough to actually get those gears moving in that way. And as we mentioned earlier, lower oil prices have brought with them a lower Canadian dollar and that comes as positive news to manufacturers, let’s say, in Ontario or Quebec, who have been under stress. So the resource side has been faster and the manufacturing slower, and you’d expect to see less of a gap. But we should bear in mind that the terms of trade—this is, you know, the result of all the commodities that we produce and our net exports in them, not just oil, but other things—have come down, [though] they’re still much higher than they were, say, 10 years ago. So that terms-of-trade effect is still working its way through, people are still making investment plans based on that, and so I think two-track is probably going to remain a feature. But at the moment I’d say that the gap between them would narrow, and that’s of course a more balanced type of growth, which would be welcome, I think, to most people.

Some economists have complained that you tend to overlook positives in the economy, implying that you look for negatives to justify keeping rates low. Why do you think that perception exists?

Given what we’ve been through and the process of serial disappointment, it’s natural to be more concerned about the downside than the upside. Even though the U.S. has had strong growth the last while, you’d have to say, “Yeah, but it’s with interest rates at zero. What would you expect?” What you’d expect is we would have had fast growth a long time ago, and it hasn’t happened. From a policy-maker’s standpoint, if we’re wrong about our outlook in the economy, if inflation would begin to creep up sooner, we know exactly what to do about that. If we’re wrong the other way and inflation resumes its down trend, we have very few tools left to take care of that. So I think it’s natural for someone like me to talk a lot more about those negatives, and not dismiss the positives, but say, “Well, I need to see four, five or six of those in a row to be convinced that I don’t have to worry as much anymore.”

Mark Carney and Jim Flaherty used to talk about the housing market and indebtedness a lot more than you and Finance Minister Joe Oliver do now. It seemed to be a big macro risk at one point, and now it seems to be something kind of on the back burner. Why is that?

Well, I would say we’ve made some advances in methodology. In our last financial-system review, we introduced an entirely new methodology, and what’s key to that is we talk about vulnerability, as opposed to risk. How I would characterize the situation in the housing market right now would be that there’s been excessive buying. But if there were a downturn in the economy, and unemployment rose, or if interest rates went up suddenly—bond rates, not short-term interest rates—then that could put the housing market at risk. But the vulnerability is worth analyzing all the way and, if you say, “Well, there’s no catalyst,” it’s okay. So we don’t expect interest rates to go up a lot, or fast; we aren’t predicting another recession. We say, “Well, those risks are more remote, but the vulnerability is elevated,” and that changes the tone of that conversation. They have not gone to the back burner; we spend a lot of resources on monitoring developments in the financial system, and we don’t have a policy discussion without reviewing all of that.

You know, in Vancouver, the only detached house for sale under $600,000 is a houseboat. Do you see a problem?

I acknowledge that that’s expensive for a house, but I’m old enough to be able to say that for my entire adult life, it’s been expensive to buy a house in Vancouver. When I was in my 20s, I would say, “Wow, it’d be nice to live in Vancouver,” but I could never afford it. And I think that that’s got to have something to do with Mother Nature: where Vancouver is, what it offers. So I think we have to set that aside and ask, “Well, what about housing in general?” That’s really the way to look at it, as a macro phenomenon. House prices are elevated relative to incomes. That’s a natural consequence of what we’ve been doing, which is to try to boost the economy, to offset the headwinds from the world with low interest rates. No one believed it would take this long, and, therefore, those things have accumulated on us. We have to continue to monitor it.

You took a lot of heat last month when you advised young people to work for free to get experience. Did any of the criticism change your view at all?

Obviously, a lot of people—including myself—care about this issue. It’s a very common issue among all major economies. What monetary policy can do is use all of its tools to get the economy back on a sustained track. When confidence is re-gathering its strength, you’ll see companies investing in new capacity and new companies emerging, which create the lion’s share of new jobs in our economy. So making sure those conditions are creating those sustainable jobs, that’s what we’re here for. Youths have a harder problem when they come out of school and there isn’t a good job market because they can’t really get that first experience, and that’s hard to manage, I understand that totally.

So it’s still the same view, just . . .

Well, you know, that’s the macro picture as we describe it, and I totally sympathize. Everyone should know that everybody is doing the maximum that we can, and I think that the headwinds that are holding back the economy—the global ones—on glance seem to be dissipating, primarily in the U.S. A couple or three months of decent job creation is not much, and the hours worked in the economy have only risen 0.4 per cent in the last 12 months. That means that a lot of the growth we’ve had is in part-time work, and a lot of people would say, “I’d rather work full-time,” so this isn’t quite what I’m looking for. So all of those things suggest that if you’re working part-time and you have some sort of a volunteer role with a non-profit, those are not bad things to have on your CV. But I would never consider volunteering for something to be a substitute for a full-time job.

We’ve got Boomers leaving the workforce and employers demanding skilled workers. Why can’t we transition from one generation to the next in the job market?

You’re describing it as a structural problem, and I don’t think I would. In a structural sense, we know the Baby Boomers are on the verge of retirement, and it means that young people are going to have lots of opportunities. But we have to layer on top of that this big cycle—and a long cycle—that happened from the [financial] crisis. Most business cycles will only be a couple of years long. You have a recession, so people cut back production, lay off your workers, so you become unemployed. Six or nine months go by and then you’re called back, right? So that’s typical. When it’s a long one and a slow one—and in our case the dollar went up at the same time—it actually destroyed some capacity in the economy. Those jobs are actually gone, and what we have to do now is wait for them to be recreated. You have to wait for somebody to say, “Yeah, I’m ready to expand my business and create another 30 jobs,” or, “I’m ready to start a brand-new business.” That process has been slow to get restarted.

At some point between 2015 and 2020, we’ll have more seniors than children in Canada. Growth is going to be slower. Do you see it as the job of monetary policy to make up for that lag, or is that something we just have to accept?

No, it is something we’ll have to accept. It’s easy for us to forget there was a baby boom, because it lasted for 50 years. So that has boosted our growth rates in many countries around the world, and now we’ll settle down into a slower trend.

What is it going to mean for monetary policy? The retirement of Boomers is a decades-long process. Are we looking at that kind of a time frame, too?

Yes, for the foreseeable future. What it means is a lot of things, [including] lower economic growth. As we see that unfold, the neutral rate of interest will be drifting down. Growth is going to slow to around two per cent and interest rates will follow that down, so that becomes the destination [for rates], since we’re more or less at zero or one per cent [now]. Where interest rates will settle will be at a lower number than we were used to five, 10 years ago. When will interest rates go up? Well, I’m not sure. But how far will they go up, that’s an easier question to answer, and the answer is not nearly as far as we thought from the previous cycle.

What happens when rates do rise given the level of indebtedness that Canadians have?

Well, no doubt the Canadian economy would be more sensitive to a fluctuation in interest rates today than it was before the crisis, precisely because we’ve put some more debt on our books. At this stage, we really don’t know the answer to that question. We can make some educated guess but our models are based on, say, the past 30 years of average, and all we’d know is, “Well, it’s going to be more sensitive than it was before.” But that’s all tied up with this thing I just described, the [lower destination of interest rates], because if you’re not going to go nearly as high, say in five years or whenever interest rates are going to be back to a steady state, that’s okay because you’ve got more debt to service, right? And so I think that it all works out in the end.

We’ve talked about how much indebtedness there is. That makes people vulnerable to a downturn in employment or a sudden rise in interest rates, neither of which, as I said before, we’d be expecting. But, of course, vulnerable in a sense that if interest rates were to go up half a point, that would cost people some money, but it’s not much in the big picture. And debt service is a reasonable share of people’s incomes, despite everything that has gone on. So, in the end, as the economy gathers strength, when we get those jobs we talked about, all those parameters are going to look better, the sustainability of those debts will look much better.

You know as well as anyone the risks of keeping interest rates too low too long. Given that we’re now at a point where rates have stayed at the same level for the longest time since the Second World War, how long is too long?

We don’t know. That’s the honest truth. I could be a little more precise than that, that’s being cute. But I think that if we look at, say, the level of [household] debt right now, 165 per cent share of income, there are other countries with much higher numbers than this. So you don’t really have a metric for deciding what is too long or too high. And I’ll give you a for-instance: we know that people who grew up in the Great Depression—like my parents—were very anti-debt. If they had a mortgage they were paying it off as fast as possible. My generation grew up more in the ’60s and ’70s, a higher inflationary period, and for maybe that reason they think [debt is] okay. And then my kids are more likely to say, “I don’t really want any debt.” And that’s what we kind of see in the broad picture. So what that means is, as folks of my parents’ age pass away, low-indebted households are being replaced by higher-indebted households in the structure, and so for that reason alone those numbers could keep going up. Plus, the financial system is much safer today than it was five or 10 years ago, not just ours but the world’s. So for all those reasons I’m afraid you can’t just say what’s too long, what’s too much. But what you do is you continue to monitor all that and look deeply and stress-test. Those are good tools to ask, “Is the financial system vulnerable? Is there something, as a central bank, we should be doing? Is there something that we should be doing in a broader policy environment?”

If, three years from now, low rates haven’t had the desired effect, will central banks have to rethink this approach?

There are other tools in the toolkit. We can talk about those things if that comes to pass, but we’re not preoccupied with that at all. I’ve referred to Mother Nature, which is a friendly way to talk about how there are natural forces acting [on the economy], and when we can identify the things holding back the natural forces and watch them gradually dissipate, that encourages us that we’ve got the model right. So I think that that’s the case. But you’re right: If we were still sitting here, talking about the same things three years from now, I think [that], long before that, we would have been talking about some different options. But I really think that that’s not an occurrence.