OTTAWA — A top Bank of Canada official points to three areas that could lift the economy’s future growth prospects and have helped in the past: education, immigration and trade liberalization.
Deputy governor Lawrence Schembri mentioned the potential prescriptions in a speech Wednesday that was focused on exploring and demystifying what he called the “somewhat abstract notion” of potential growth, which provides a reading on what the economy can achieve on a sustainable basis over the long run.
He described it as a vital piece of information for the Bank of Canada as it gauges inflationary pressures and contemplates its interest-rate decisions. However, Schembri also described it as slippery number that can be tricky to pin down, to the point it’s “hypothetical.”
One thing about it is apparent: it has been on the decline.
The bank estimates that Canada’s annual potential growth will average 1.8 per cent between 2009 and 2021, which is much weaker than the 2.7 per cent average from 1982 to 2008.
But that doesn’t mean there’s a shortage of tools to jack it back up again, he argued.
“A significant development in recent decades is that growth in potential output has been on a generally downward trend in most major advanced economies, including Canada, largely owing to the aging of our populations,” Schembri said in a speech to the Ottawa Economics Association and the CFA Society Ottawa.
“Nonetheless, we have a rich history of generating economic opportunity and supporting growth, and we should draw from past successes in developing future policies.”
Schembri emphasized what he sees as possible solutions in key areas that, he also acknowledged, sit outside the central bank’s policy jurisdiction.
Amid a “formidable challenge” presented by the country’s aging population, Schembri listed the need for more immigration as a remedy that will deliver increasingly necessary injections into the labour supply.
He stressed, however, that the country must do a better job of matching newcomers’ skills with the needs of the workforce in order to get the most out of higher immigration levels.
A boost in the areas of education and training would help workers keep up with the acceleration of technological change, make them more productive and contribute to the reduction of income inequality.
“Both education policy and immigration policy are critical,” Schembri said after the speech as he responded to questions from the audience.
“They are outside our mandate, but they’re important to our outlook for potential output growth. And because potential output growth is important to the conduct of monetary policy, we have an interest in that.”
When it comes to trade liberalization, the deputy governor said Canada’s potential output could get a lift by opening up new avenues and by lowering more barriers for companies.
It must, however, maintain a focus on ensuring workers will also see some of the benefits, he said.
But even if Canada raises its potential growth, he said the considerable uncertainty around the data used to identify it means the bank can really only aim for “reasonably robust estimates.”
“The main challenge in measuring potential output is that it is hypothetical, so it is not directly observable,” he said.
“We can only estimate it.”
Bank of Canada governor Stephen Poloz has introduced three interest rate hikes since last July following an impressive economic run for Canada that began in late 2016.
With the benchmark at only 1.25 per cent, the bank remains clearly on a rate-hiking trajectory. But the key questions at the moment surround how quickly and when the bank will make its next move — because Poloz has held off raising the rate since his January hike.
The bank’s next announcement is May 30, but many experts expect Poloz’s next increase to come at July’s policy meeting.