Remarks by Tiff Macklem
Governor of the Bank of Canada
Greater Vancouver Board of Trade
December 15, 2020
Vancouver, British Columbia
(via Webcast)
Trading for a sustainable recovery
Introduction
I'm sure
The year is coming to an end, and not a moment too soon. most of us
can't wait to turn the page on 2020 and COVID-19. The pandemic has touched
everyone, and the hardship has been severe for many. Some of you have lost
loved ones. Others have lost jobs or businesses. And we all miss our family and
friends, especially at this time of year.
we've
For months, wondered when we can get back to something approaching
normal. I wish I could be in Vancouver delivering this speech in person and
hearing about your concerns directly. Unfortunately, the time for face-to-face
meetings has not yet come. But we can be together virtually, and I thank you for
the invitation to speak with you today.
The recent positive news on vaccines provides some reassurance that more
normal activities can resume sometime later next year. However, the path from
here to there looks difficult. A second wave of COVID-19 is sweeping across
much of the country, leading to renewed restrictions. These will weigh on
economic growth early next year and increase the strain on Canadian families
and businesses.
I don't want to downplay
these difficulties. But today, I want to look beyond this
second wave and focus on a critical piece of our economic recovery-trade. So
far, household spending has led the way. But for the economy to fully recover, it
needs to be firing on more than one cylinder. To be sustainable, the recovery
must broaden to include exports and, with this, business investment.
Because we all need to lift our spirits as we head into the holiday season, I want
to end the year with some cautious optimism. My message is that exports and
business investment could bounce back from this recession more quickly than
they did after the global financial crisis. But for this to happen, we all have some
work to do.
Allow me to start by looking back a decade to the recovery from the global
financial crisis to compare how trade was evolving then with how it is evolving
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I'll show you what's at I'll
now. stake with a robust export recovery. And close
with some thoughts on how we can improve the odds of bringing this about.
Comparing crises
The global financial crisis pummelled the world economy back in 2008 and 2009.
But Canada fared relatively well because of our strong financial system. Our
recession was shorter and shallower than in most other economies. But our
That's
exports were hit hard-indeed, harder than most. because of our close
ties with the United States, which was the epicentre of the crisis. While global
exports fell by less than 20 percent, Canadian exports fell by close to 30 percent.
As is usually the case in recessions, demand for goods was particularly affected.
Canada swung from having a large trade surplus in goods to a small deficit.
(Chart 1).
Chart 1: Canada's trade balance has been negative since the global
financial crisis
(Quarterly data, seasonally adjusted annual rate)
Can$ billions
100
80
60
40
20
0
-20
-40
-60
-80
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Goods Services Total trade
Source: Statistics Canada Last observation: 2020Q3
Canadian exports began to recover immediately after the crisis, but the rebound
stalled. Weak foreign demand, particularly from the United States, was holding
exports back. But that wasn't the whole story.
Bank of Canada researchers spent a lot of time dissecting these disappointing
exports and zeroed in on two fundamental issues: geography and
of Canada's underperformance was blamed on
competitiveness. Two-thirds
geography-who we trade with. Canadian export markets were concentrated in
mature economies with relatively slow growth, such as the United States, rather
than faster-growing emerging-market economies, largely in Asia. The remainder
of this poor performance was tied to a lack of competitiveness: unit labour costs
in Canada were higher than elsewhere because of slow productivity growth and
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regulatory
the impact of a stronger currency. Canada's regime and investment
climate were also cited as impediments.1
Now let's look at how this
past experience compares with today. While the period
leading up to the global financial crisis was positive for trade, the period before
the pandemic was anything but. Trade disputes arose between the United States
and several other economies, including Canada, the European Union and
particularly China. These disputes led to escalating tariffs and pervasive
uncertainty about global policy. Bank researchers estimated that these factors
more than
combined would reduce global output by more than 1 percent-that's
In this environment, it's no
$1 trillion-by the end of 2021.2 wonder companies
were reluctant to invest to expand their export capacity.
Another difference between these crises is that, this time, trade in services has
been affected much more than trade in goods (Chart 2). The impact on services
was barely visible during the global financial crisis, whereas services fell along
with goods in 2020. And overall, services haven't recovered, even as goods have
rebounded.
Chart 2: Canadian exports: global financial crisis compared with COVID-19
pandemic
(Nominal data, Seasonally adjusted annual rate, Index: start date = 100)
Index
120
110
100
90
80
70
60
t -2 t -1 t t +1 t +2 t +3 t +4 t +5 t +6 t +7 t +8
Start date (t) +/- number of quarters
Goods-GFC Goods-COVID-19 Services-GFC Services-COVID-19
Start dates: global financial crisis (GFC), 2008Q3;
Source: Statistics Canada
COVID-19 pandemic, 2020Q1
Last observation: 2020Q3
Consider international tourism exports, which are vital to British Columbia.
Tourism has basically come to a full stop. Canadian education exports have also
been hit by the pandemic. When a foreign student comes to Canada to study, the
tuition counts as an export of education services. Before the pandemic, this was
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a large and fast-growing activity. In 2019, educational services exports were
almost $14 billion, an increase of 67 percent from 2015.
The disproportionate impact of the pandemic on trade in services has significant
implications for Canada. Services exports are only about a quarter of the size of
goods exports. But services exports had been growing much more quickly than
goods exports before the pandemic (Chart 3).
Chart 3: Services exports outperformed goods exports before COVID-19
(Seasonally adjusted annual rate, Index: 2015Q1 = 100)
Index
140
130
120
110
100
90
2015 2016 2017 2018 2019
Total goods and services Total goods Total services
Commercial services Travel services
Source: Statistics Canada Last observation: 2019Q4
While many services exporters will struggle until a vaccine is widely available,
some goods exporters have been able to adapt safety protocols and bounce
back quickly. Motor vehicle and parts output, for example, came to an almost
complete stop in the spring. Since then, the sector has regained nearly all of the
lost ground as factories adapted their value chains and production processes.
The rapid rebound in goods exports is certainly encouraging. By October, the
value of goods exports had recovered almost 90 percent of the loss seen in the
spring. If struggling services exporters can hang on until a vaccine is widely
Canada's
available, export performance could avoid the serial disappointment of
the period that followed the global financial crisis and help cement a sustainable
recovery.
Of course, this is by no means guaranteed. The rebound in goods exports could
fizzle out as companies finish rebuilding inventories, while prolonged hardship
could force many services exporters to close their doors. And the underlying
competitiveness challenges that have restrained export growth over the past
decade have not gone away. More recently, the Canadian dollar has been
appreciating, largely reflecting a broad-based depreciation of the US dollar. This
is hurting the competitiveness of Canadian exporters in our largest market.
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Two scenarios for trade
Let's imagine a couple of plausible
Where does the trade story go from here?
scenarios: one pessimistic, one optimistic.
In the pessimistic scenario, the global spread of COVID-19 fuels
antiglobalization sentiment and a continued rise in protectionism. This is not
farfetched. A recent Ipsos poll found significant support among Canadians for
measures that would make the country less reliant on international trade. The
same poll found much less support for measures that would help Canadian
companies export more. This is troubling because international markets are
essential for Canadian companies to achieve competitive scale in their
operations and because Canada benefits from imports in many important ways.
In the pessimistic scenario, we also fail to diversify our trade or improve our
competitiveness. Rivalry and distrust between the United States and China
thwart our efforts to develop export markets in Asia. Investment remains weak,
What's
and our productivity growth continues to lag. more, new market access
for our energy products doesn't come on Canada's ability
stream, holding back to
ship our number one export-oil. And without that market access, investment in
cleaner oil-extraction technologies dries up. The bottom line is that exports fail to
rebound, and trade does not become a reliable engine of growth.
In the optimistic scenario, many of these same forces break the other way. The
strong rebound in world trade we have seen to date continues, and the
protectionist forces that have dominated in recent years begin to fade.
Unprecedented international cooperation to develop new vaccines and supply
them across borders proves to be a potent demonstration of the benefits of
globalization. That success shifts public opinion. Governments start to knock
down the tariff walls they had begun to build, and uncertainty lifts as
governments recommit to a rules-based trading order.
In the optimistic scenario, efforts to diversify markets for Canadian exports start
Canada's
to bear fruit. productivity improves as a result of increased investment
economy's
and the deployment of new technologies, which boosts the
competitiveness. Canada and the new US administration cooperate on a North
Canada's oil and gas
American approach to energy and climate change. sector
benefits from access to markets. And we start to see an integrated continental
approach to business opportunities from low-carbon growth. In this scenario, we
see a resurgence of trade and business investment, which bolsters the economic
recovery.
the Bank's
The stakes are high. Using one of economic projection models, Bank
economists estimated the impact of two scenarios that are less extreme than the
optimistic scenario, Canada's trade balance
ones I have just described.3 In their
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would be more than $30 billion better by the end of 2024 than it would be
otherwise. This would roughly eliminate our current trade deficit. But in their
pessimistic scenario, exports would actually drift lower rather than recover,
reducing incomes, while our current trade deficit would worsen by about 60
percent (Chart 4).
Chart 4: Evolution of trade deficit in two scenarios
Real trade deficit, difference from base case
Can$ billions
40
30
20
Peak impact: $53 billion
10
0
-10
-20
-30
2021 2022 2023 2024
Upside Downside
Note: Assumes no policy rate reaction Last data plotted: 2024Q4
In reality, the outcome will probably fall somewhere between the two extremes.
Obviously, we all hope that real life turns out closer to the optimistic scenario
than the pessimistic. But hope is not a strategy. We need to think strategically to
increase the odds of a strong trade recovery.
Markets for our products
Business leaders and policy-makers each have important roles to play. They
need to work together to leverage, broaden and deepen global markets for
Canadian products.
Thanks to the signing of the Canada-US-Mexico Agreement, the Comprehensive
Economic and Trade Agreement with the European Union, and the
Comprehensive and Progressive Agreement for Trans-Pacific Partnership,
Canada already has some of the best market access in the world. Further, we
have numerous bilateral trade deals in place. The business community and
governments across Canada need to work together to leverage these market
opportunities.
The business community can capitalize on this market access by investing in
people and in productive capacity. We know Canada has an incredibly diverse
workforce-people have come from around the globe to live here, bringing their
seen clear evidence
global connections and knowledge with them. And we've
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that shifting populations can drive trade.4 Smart companies can leverage
Canada's
workforce advantage to build global markets for their products.
Companies can also look to global supply chains for growth opportunities. Supply
chains are trending toward more regional networks around major global trade
hubs. Global companies invest in the resilience of their supply chains through
diversification of suppliers or production locations, and through digitalization and
automation. Canadian companies need to seize these opportunities to be part of
the solution.
As policy-makers and business leaders, we have the responsibility to explain the
importance of rules-based trade. We need to push for a renewal of the spirit of
internationalism that served so many countries well for decades. And we need to
make sure that the benefits of open trade are shared fairly within and across
economies.
With COVID-19 accelerating the digital economy, rules for digital trade and
competition are more critical than ever. This also highlights the urgent need for a
concerted, internationally coordinated effort to improve the ability to measure the
digital economy. This is a priority for Statistics Canada, but much more work
remains, and success will require cooperation across countries.5
Products for our markets
As much as geographic diversification remains important, it's not going to be
let's
easy or happen quickly. So, look at this another way. We do need to develop
new, fast-growing markets for our products, but we also need to develop new,
fast-growing products for our markets. We have to grow and scale up production
of high-value goods and services that we can export.
The BC economy offers some leading examples of how this approach can work.
On the services side, there are lots of success stories in Vancouver-where the
world's first
commercial quantum computer was built and now the home of one of
Canada's most important technology hubs.
Activity in these hubs is driving strong
growth in exports that are as easy to ship to South Africa as they are to Seattle.
Canadian exports of knowledge-intensive services such as research and
development, computer and information services, and intellectual property grew
It's clear that
by close to 12 percent over the past three years (Chart 5). digital
services-including e-commerce, online education and application
development-will be an important part of the future of trade. So will other BC
specialties, such as video game production and animation studios.
The pandemic is also accelerating growth in other technology services. Doctors
and hospitals are finding new ways to use technology to provide health care
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virtually. With the explosion of remote office work, there are tremendous
opportunities in areas such as cyber security, cloud computing and the
development of virtual workplaces. Given the worldwide nature of the pandemic,
advances in the digital economy can more easily become scalable, fast-growing
exports.
Chart 5: Knowledge-intensive sectors have been growing rapidly, positively contributing to Canada's
trade balance
Can$ billions
5
4
Audio-visual services
3
2
Other business services
Knowledge-intensive
services (Research and
1
development, intellectual
property, computer and
information)
0
-1
Technical services
Management and (architectural, engineering,
advertisement services etc.)
-2
-3
Insurance and finance
-4
-5
-10 -5 0 5 10 15 20 25 30
Average nominal growth (2016-19)
%
Source: Statistics Canada
Note: Bubble size corresponds to scale of exports in billions of dollars. Bubble colour indicates
positive if red, negative if blue.
We've also seen lots of BC companies
innovating by applying new technology in
traditional goods sectors. Think forestry. We know the industry is under pressure
from long-term supply constraints. But companies are adapting. Instead of
wasting bark, wood chips and sawdust, companies are turning these into
the world's
bioenergy. Canada is now second-largest exporter of wood pellets-
an attractive fuel replacement for coal in power plants. The mass timber industry
provides another example. The 18-storey Brock Commons Tallwood House on
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Columbia's
the University of British campus, which uses structural wood to
replace most of the steel and cement, is a shining example of how Canadian
innovation and know-how can create new high-value and sustainable products
from our natural resources. You can find similar examples across other sectors
such as mining and agriculture.
Finally, I want to mention another opportunity that is also a strength for British
Columbia-renewable energy and other green technologies. This includes clean
energy production, goods such as solar panels, and services such as design and
of Canada's clean
construction. Vancouver is home to one-quarter technology
companies, with revenues of about $3.5 billion last year.6 The export potential of
green technology is obvious, given global concerns about climate change.
Winning in global markets
Canada's
That brings me to my final topic, which is ability to compete and win in
won't be able to fully capitalize on
global markets. We our opportunities unless
we take steps to improve our productivity and competitiveness.
Businesses have the leading role to play here. Investment in
productivityenhancing machinery and equipment is vital. So is a commitment to research
and development and to constantly train and re-skill employees.
Several factors contribute to business investment decisions. But right now, the
Bank of Canada has given forward guidance that borrowing costs are going to be
low for a long while, and there's light at the end of the tunnel as vaccines roll out.
This seems an opportune time for companies to look at how they judge the rate
of return on potential investments-the so-called hurdle rate. Taking a
longerterm approach to capital investment could unlock a myriad of viable growth
opportunities.
Policy-makers, for their part, can help by removing barriers to business
investment and impediments to growth of smaller firms. Let me mention three
areas of focus.
First is the ongoing need to remove obstacles to interprovincial trade. This comes
the Bank's
up regularly in conversations with business leaders. Over the past
nine months, the provinces and the federal government have demonstrated
tremendous cooperation in dealing with the pandemic. Think what we could
achieve if that same spirit of cooperation was applied to removing barriers to the
movement of goods, services and professionals across provincial borders.
A second area of focus is infrastructure. Exporters will remain reluctant to invest
doesn't
if the infrastructure to get their products to market exist. Canada has
made some progress here. The LNG plant being built in Kitimat is one notable
example that will help our energy exports in the future. However, more needs to
be done. I met with leaders of a number of logistics companies last month. They
shared their concerns about bottlenecks, particularly at ports. Fast-growing
exports need reliable transportation infrastructure, including efficient,
highcapacity ports. And I know that both the Port of Vancouver and Port of Prince
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Rupert are working on major capacity expansions. This is encouraging. Boosting
our export capacity also requires building the information and data infrastructure
needed to compete in a digital world.
A third area of focus is people. Our biggest asset is a well-educated and diverse
workforce. For the past four years, the policies and attitudes of the US
administration helped make Canada look more attractive to students and
workers, giving us an advantage. With the incoming US administration, Canadian
schools and companies may have to fight harder to attract and retain talent. But
being a welcoming country remains an important advantage, and immigration
creates economic capacity. We need to focus on ensuring that Canada maintains
a well-educated, multinational workforce to attract foreign investment, leading to
increased exports.
Conclusion
It's time for me to
conclude.
The economic recovery from the pandemic is at a very difficult stage. Near term,
rising COVID-19 infections will dampen growth and could even deepen our
economic hole. Uncertainty is elevated, and the recovery is going to be long and
choppy.
Nevertheless, there is room for cautious optimism that international trade will
recover more quickly from the pandemic than it did from the global financial
crisis, and Canadian businesses need to be ready. Since the initial shutdowns
last spring, trade has bounced back faster than many economists had predicted.
Recent international surveys suggest executives expect trade to be strong in
2021.7 And the news of effective new vaccines puts a more certain timeline on
the resurgence of global demand.
There is no single path to stronger exports, and as business leaders, you need to
decide on the best strategies to move your company forward. These include
investing in new markets and products and improving your competitive position.
As a country, we need to leverage the broad trade access we have and work with
like-minded countries to foster a renewed spirit of open, rules-based trade that
works for the 21st century. We also need to remove barriers to investment and
other obstacles that keep Canada punching below its weight in global markets.
Think about the opportunities and imagine the possibilities. Canada has dynamic
business leaders with good ideas, and Canadian businesses have responded to
the pandemic with ingenuity. We also have a diverse, well-educated workforce
and significant global market access. The Bank of Canada has pledged to
support the investment climate by keeping borrowing costs low until economic
slack is gone. Together, we can secure a resurgence in exports, broaden the
recovery and put the economy on a sound, sustainable path.
7
HSBC, Navigator 2020: Now, Next and How for Business (2020).