Remarks by Angel Gurría,
13 June 2016
Je suis ravi d’être à Montréal pour lancer l’Étude économique du Canada 2016 (English version), et étant à Montréal je commence en français. Je voudrais remercier le gouvernement, et surtout Finance Canada, pour leur appui dans la préparation du rapport. Et je suis content de pouvoir présenter l’Étude aux côtés du ministre Morneau.
I would flag that we are today also releasing another report in our Better Policies series, which looks at Canada’s policy performance across a broad range of areas, with recommendations in each. I handed a preliminary version of this report to Prime Minister Trudeau late last year, but we have been refining it since then and today are making it public.
Canada continues to face economic headwinds. In particular, the fall in oil prices from mid-2014 hurt Canada’s terms of trade and severely dented activity and investment in the energy sector. This pulled the economy into recession in 2015, and unemployment, which had been falling since the crisis, turned back up.
As a result, Canada risks becoming a good, or perhaps I should say a bad, example of a country stuck in a low-growth trap. As we described in our latest Economic Outlook, this is a problem afflicting many advanced economies. Firms have little incentive to invest given sluggish demand, but weak investment reduces productivity growth. That makes households less optimistic about the pace at which living standards will rise, which means slower consumption growth. And that in turn means sluggish demand growth for firms, making them reticent about boosting investment. A vicious circle.
But Canada is also a good example, and here I really do mean good, of a country taking the right measures to break out of the low-growth trap. The Bank of Canada has pursued an accommodative monetary policy – policy rates are at record lows. And importantly, the new government has recognised the need for complementary fiscal action, taking advantage of the extra fiscal space provided by low interest rates. The significant but prudent easing of fiscal policy, with higher public investment, means that monetary policy is not left to do all the heavy lifting to support demand, while fiscal sustainability is still protected. In this respect, Canada is an example to other advanced countries.
And the initial signs are promising. Unemployment has fallen by 0.4 percentage points from February to May, and we see growth reviving, despite the negative impact of the Alberta fires. We project GDP growth to pick up by about half a percentage point both this year and in 2017.
Canada has also done a good job of managing risks associated with “low-for-long” interest rates. Canada's banking system is sound, and the authorities have implemented a series of measures to cool the house price boom, with the latest coming in February. We think, however, that further macro-prudential measures will be needed. House prices and household debt have risen to record levels in relation to household incomes, especially in Toronto and Vancouver. And Canada is vulnerable to a drop in house prices, since the share of residential construction in GDP is the OECD's highest.
So on the macro-policy front, Canada is responding to the challenge of low commodity prices and weak demand, and it is also doing a good job at managing the side-effects of that policy response, even if further macro-prudential measures may be needed. But I don’t want to encourage complacency. There is another area where growth-enhancing policy action is needed, and this is where Canada does less well.
Productivity growth in Canada has long been weak. There is no simple diagnosis, still less any easy solutions. Nevertheless, some structural policy settings look ripe for improvement, and the Survey focuses on these. They include barriers to competition in network sectors, barriers to inter-provincial trade and weaknesses in small business programmes.
A key example of the problem of weak competition in network sectors is the fragmentation of electricity markets. In some cases developing more east-west interconnections would help, and jurisdictions that have not yet liberalised generation and distribution should do so.
The priority in addressing the longstanding problem of barriers to interprovincial trade is to broaden the coverage of the Agreement on Internal Trade and reconcile provincial and territorial regulations for trade in goods and services and labour mobility.
As regards boosting small business dynamism, governments should review existing small business programmes, including preferential tax arrangements, to ensure that they target clear market failures.
Action in these areas would help to boost productivity growth. But that growth will only be sustainable if its fruits are shared widely and if the environment is protected. I am pleased to say that in the areas of inclusive growth and environmental sustainability, we again see Canada facing up to difficult challenges and showing leadership.
Low-income families and Indigenous Peoples have inferior well-being outcomes. I therefore welcome both the introduction of the Canada Child Benefit, targeted to families in need, and the government’s focus on Canada’s Indigenous Peoples, including increased funding for their education, housing and infrastructure.
On the environmental front, at COP21 Canada made a commitment to reduce its 2030 greenhouse gas emissions by 30% compared with 2005. Provincial mechanisms to reduce emissions have so far been uncoordinated, so I welcome the Vancouver declaration to ensure that a price is placed on carbon emissions across the country to allow Canada to meet its commitments in an efficient way. Canadian governments must now act on this declaration.
Ladies and Gentlemen,
The government has laid out an ambitious agenda for strengthening growth and making it greener and more inclusive. Of course, this is Canada, which means that the federal government will need to work with its provincial and territorial counterparts to realise these objectives. As if the problems were not hard enough already. But be assured that the OECD stands ready to support Canadian policymakers at all levels to design, develop and deliver better policies for better lives.