Remarks by Carolyn A. Wilkins
Senior Deputy Governor of the Bank of Canada
Munk School of Global Affairs and Public Policy
November 12, 2020
(via webcast)
Exploring life after COVID-19: the far
side of the moon
"Anticipating problems and figuring out how
to solve them is actually the opposite of worrying:
it's productive."
- Guide to Life on Earth
Chris Hadfield, An Astronaut's
Introduction
Good afternoon and thank you for joining me. Thanks also to the Munk School
Given what's going on in the
for the invitation. world today, healthy debate
around global affairs and public policy is more important than ever.
It's hard to believe that the COVID-19 pandemic was declared almost exactly
eight months ago. Canadians have been affected on so many fronts-in our
workplaces and in our homes. There are still more than 40,000 active cases and
we've
more reported every day-but heard some good news recently about
vaccines.
I'm happy
to see the economic recovery underway. However, the pandemic is
still in full throttle, so we continue to face considerable challenges.
I'd like
Today, to take us beyond the current context and discuss what we will
need to thrive in the post-pandemic world. Right now, the future may feel like the
proverbial far side of the moon. Much of what we knew about the moon 70 years
ago was based on the side we could see from the earth. Like the explorers back
then, many among us feel compelled to consider the unknown-to shed light on
the dark side.
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Right now, many unknowns obscure our vision, but we can still map out
economic scenarios that will help us plan our path forward. In the Bank of
most recent
Canada's outlook, published in the October Monetary Policy Report,
we expect the recovery in Canada and around the world will continue. The
recovery will take time, however, and will require policy support for a while.
Taking a longer perspective, we expect that COVID-19 will leave an unfortunate
economic legacy through its impacts on investment, the work force and
productivity. In our most recent projection, this adds up to a situation where
Canada is likely to exit the pandemic with a lower profile for potential output. That
means a significantly diminished ability to generate goods, services and incomes
on a sustainable basis. And many of those scars could become permanent
without deliberate actions from all of us.
I'd
first like to walk you through what is driving our revised estimates of potential
I'll talk about
output. Next, the need to boost these numbers to raise the
I'll end
prosperity of Canadians and help manage the high debts we now face.
with how the Bank will provide a strong and stable foundation to build on.
Exploring the far side
Economists use the idea of potential output to think about what the economy can
produce if it's operating at full capacity-if everyone who wants a job is either
employed or able to find a job quickly, and if all the available capital is put to full
use. As a result, potential output depends on our capital stock, our labour force
and our productivity.
Potential output is important for central bankers because it helps gauge inflation
pressures. It's important to Canadians
because it determines our capacity to
and pay down debt. I'm
generate the income needed to spend, save, borrow
starting here because many of you are wondering how we are going to service
the debts that will emerge from the pandemic.
Like the far side of the moon, potential output cannot be directly observed.
Economists use specialized tools and a dose of judgement to get a picture of it-
picture isn't we've revised
and the pretty.1 When it comes to the global economy,
our estimate of potential output growth over the next few years from about 31⁄4
percent to 21⁄2 percent.2 The downward revisions are across all regions and in
countries important to Canadian exporters, such as the United States. The new
estimate of potential output growth for the United States is now around 11⁄4
Canada's potential
percent, when it was nearly 2 percent before COVID-19.
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output growth has been downgraded even further, from around 1.8 percent to a
bit less than 1 percent.
So, what are the main factors driving these results?
The first factor relates to capital. Investment in capital has taken a hit and the
recovery will be protracted, meaning slower growth in the stock of capital.
Weaker aggregate demand and higher uncertainty will cool the appetite to invest
among many firms while forcing others to shutter entirely. In Canada, this is
impact on oil prices and investment in the energy
compounded by COVID-19's
sector. Overall, weaker capital accumulation explains about three-quarters of the
downgrade in potential output growth for Canada over the next few years.
Two other factors account for the remaining quarter of the downgrade, which is
about evenly split between them.
The first of these factors has to do with the work force. We expect to see what
economists call "scarring": many people who were in the work force may become
discouraged from a particularly difficult job search or may not yet have the skills
for the jobs available. The hardest-hit sectors include recreation and hospitality,
which employ many young people, recent immigrants and women. These groups
are particularly at risk of being left on the sidelines for an extended period. For
Canada, the strong efforts of governments to preserve attachments between
people and employers-through wage subsidies and other programs-will help
they can't be offset completely.
limit these unfortunate outcomes. But
The remaining factor relates to productivity. We expect there will be disruptions in
labour markets and challenges reallocating resources across firms and sectors.
All of this will weigh on productivity growth. Some businesses have told us they
are interested in making their production and supply chains more regional and
resilient. This will deliver increased stability but will likely come at a small cost in
terms of productivity.
Now, even with the downgrade, the trend growth in gross domestic product
(GDP) is still expected to exceed the neutral rate of interest-the policy rate
where the Bank is neither stimulating the economy nor holding back growth. Our
revised estimates of this rate in nominal terms have been lowered by 50 basis
points to a range centred on 21⁄4 percent.3 Right now, this makes the arithmetic of
government debt sustainability more reassuring. However, we still need to be
mindful of history, which shows that this arithmetic can reverse.4
What's at stake
All told, we expect the level of Canadian potential output to be about 3 percent
lower by the end of our projection horizon in 2022, relative to what we expected
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That's around
at the time of our last update (Chart 1). $70 billion-more than
That's not
$2,000 on average for every member of the working-age population.
just in 2022, but every year afterward unless potential output growth picks up
enough to close the gap.
Chart 1 : Canada likely to exit the pandemic with significantly diminished productive capacity
Potential output in chained 2020 dollars, quarterly frequency
Can$ (billions)
2,500
Approx.
3%, or $70
billion
2,400
2,300
2,200
2017 2018 2019 2020 2021 2022 2023
October 2020 update Last update before COVID-19 (April 2019)
Source: Bank of Canada estimates and projections Last data plotted: 2022Q4
I want to take a minute to explain why we should set our sights higher. Even
before the pandemic, many were saying we should slow down, focus more on
happiness and health than on the hamster wheel of production and consumption.
It's
hard to argue with that. Still, stable jobs and incomes are foundational to
wellbeing, and stronger growth helps deliver that.5
Strong, sustainable growth would also help us to manage the heavy debt load
that has piled up over the last decade and will continue to do so because of
COVID-19. In 2009, when the global financial crisis was in full force, Canadian
households, governments and non-financial businesses owed debts totalling
about 215 percent of GDP. That number had risen to around 250 percent just
before the onset of COVID-19.6 It would have been 275 percent if GDP had
grown by 1 percentage point less per year over that period-a drop roughly in
line with our revised estimate of potential output growth. This arithmetic shows
5
For example, studies show that income (up to threshold levels) is significantly related to
measures of emotional well-being and life satisfaction. Among others, see A. T. Jebb, L. Tay, E.
and S. Oishi,
Diener "Happiness, Income Satiation and Turning Points Around the World," Nature
Human Behaviour
2, no. 1 (January 2018), 33-38. Studies also suggest that financial and
jobrelated hardships can have lasting effects on households' mental health. See, e.g., M. K. Forbes
and R. F. Krueger, "The Great Recession and Mental Health in the United States," Clinical
Psychological Science 7, no. 5 (July 2019): 900-913.
6
economy," Financial System
For details, see "Box 4: Debt in the Canadian in Bank of Canada
Review-2020 (May 2020).
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how growth can change our collective room to deal with the pandemic. It can also
change investors' and credit rating agencies' views of the risks.
Debt is a problem we share with many other countries. Countries such as
Canada that depend on foreign capital and are running significant current
account deficits are even more vulnerable.7
This vulnerability is kept in check here at home by a sound record of prudent
financial risk management and robust oversight of our financial institutions.
there's no doubt
However, that the debt burden would be easier to carry with a
stronger trend line on incomes and the tax base.
Priorities and principles for the future
people's
When it comes to financial well-being, growth per capita and how it is
distributed matter a lot. In the 10 years before COVID-19, Canadian GDP growth
averaged about 21⁄4 percent per year, near the top among G7 countries. GDP
growth on a per capita basis, however, averaged around 1 percent, near the
bottom of that pack. Why was this? Productivity gains were much lower in
Canada, so economic growth was fuelled mainly by increasing the population
through immigration. Canada is good at attracting highly qualified immigrants,
and the federal government's recent plan to lift immigration levels will boost
potential output growth over time.
we can't afford to lose sight of productivity and competitiveness.
Still, In our
consultations with businesses, they often bring up factors that are dampening
their desire to make productivity-enhancing investments here at home. These
factors include regulatory burdens, uncertainty surrounding approval processes
and obstacles to interprovincial trade. The fallout from COVID-19 won't
necessarily help matters either. Lower productivity is not just about inefficient
also about
production lines and lower profits. It's access to critical infrastructure
in remote areas and diagnostics and treatments in health care.
You may ask how we can improve our productivity performance during a crisis-
but there may be no better time. We can take inspiration from innovation that
followed major wars. While analogies between the COVID-19 pandemic and
wars are imperfect, both events force governments and businesses to adapt at
speeds they previously thought impossible. In the case of World War II, many of
those innovations set the scene for stunning advances, from mass manufacturing
of antibiotics to the beginnings of modern computing. The growth that followed
the war was instrumental in raising living standards and reducing the massive
government debt that had accumulated during the conflict.
The rapid changes forced by COVID-19 are also impressive. Canadian
companies moved millions of employees to remote work, even as they enhanced
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their digital services. Massive shifts were made in production and supply chains
to secure medical supplies. All of these innovative responses demonstrate what
we can do when we set our sights on something.
There's been a lot of good discussion already around international and domestic
tables about how to generate economic prosperity. There's a growing consensus
here at home that policies and investments are needed in areas that provide a
long-term return: education, infrastructure and technology top many lists, as do
investments in greening the economy. How exactly these are designed, however,
is the subject of much debate. As a central banker, I won't wade into that.
Instead, I'll talk about the that we'll need to challenge as we
conventional wisdom
hammer out a growth strategy. Three challenges top my list.
Some are being left behind
First, we must address the reality that market forces will leave some people
behind.
Let's
take the example of technological change, since digitalization is a promising
source of improved competitiveness and has been accelerated by COVID-19.
Conventional wisdom says that we should embrace technological change
because it will create more jobs than it will destroy. History bears this out. Around
the time of Confederation, about half of working Canadians were employed in
agriculture. Over the following decades, various innovations-including the
home-grown invention of Marquis wheat-allowed a growing population to be fed
by fewer workers. Today, the share of workers in agriculture is less than
percent. All those jobs weren't simply
2 lost. New positions were created in the
manufacturing and service sectors as the economy grew, and these now account
for the majority of employment in Canada. The same dynamic with innovation is
true today in that more jobs are created than destroyed. A recent study by
Statistics Canada finds that Canadian firms that adopted robots over the past two
decades tended to hire more people overall.8
What conventional wisdom glosses over, however, is the significant transition
costs that are borne unevenly across households. Even as the economy as a
whole benefits from technological advances, sectoral shifts can leave certain
groups without jobs and facing obstacles to finding new work. The study I just
mentioned links the adoption of robots with higher turnover and net layoffs for
some groups of workers. Other research finds that the decline in Canadian
manufacturing since the early 2000s took a disproportionate toll on men in terms
of employment and wages.9 We know that individuals, their families and
communities can often struggle for years during transitions triggered by
technological change.
8
See J. Dixon, Statistics Canada
"The Effects of Robots on Firm Performance and Employment,"
Economic Insights No. 2020024 (November 2, 2020).
9
See Statistics Canada,
"Study: The Impact of the Manufacturing Decline on Local Labour
Markets in Canada," The Daily (January 15, 2020).
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Innovations in recent decades in advanced economies have also contributed to
the rise of superstar firms with considerable market power. We've seen this
before: think of the railways well over 100 years ago. The modern
winner-takesall effect is magnified because user data have become a new source of
monopoly power.10 That's good news for shareholders and workers who have the
special skills that superstar firms need. However, it may mean that a handful of
firms now account for an outsized share of the jobs in a given industry or town,
leaving many other workers with less bargaining power and stagnant wages. This
dynamic has likely contributed to weak wage growth in many countries over
recent years.11
I think digitalization should be embraced, but we also need to decide how best to
help those individuals who are adversely affected.
As I said earlier, investing in education is at the top of the list for many. That
includes investing in continuous learning. Investments like these boost social
mobility, and they have the added benefit of improving skills in the workforce,
for me, and I'll bet for
which in turn helps potential output growth. This hits home
many students in the audience. I haven't stopped learning since I left university in
many things I've worked
the last century. Way back then, on-including
even exist.
blockchain and cryptocurrencies-didn't
I'd
also like to put strengthened competition and antitrust policy on the table,
particularly when it comes to global tech giants. And the reforms to international
tax policies led by the Organisation for Economic Co-operation and Development
and G20 are needed so that globally active digital companies contribute their fair
share.12 Statisticians and academics can help inform the debate in this area-
with better data on the digital economy and more research into how digitalization
affects different groups in society.13
10
G. Weyl,
Among others, see I. A. Ibarra, L. Goff, D. J. Hernández, J. Lanier and E. "Should We
Beyond
Treat Data as Labor? Moving 'Free,'" American Economic Association Papers and
Proceedings Philippon and L. Veldkamp,
108 (May 2018): 38-42; M. Farboodi, R. Mihet, T. "Big
Data and Firm Dynamics," American Economic Association Papers and Proceedings 109 (May
2019): 38-42; and C. I. Jones and C. Tonetti, "Nonrivalry and the Economics of Data," American
Economic Review 110, no. 9 (September 2020): 2819-2858.
11
See C. A. Wilkins, "A Look Under the Hood of Canada's Job Market" (speech to the Toronto
Region Board of Trade, January 31, 2019).
12
Among others, see Organisation for Economic Co-operation and Development, Tax Challenges
Arising from Digitalisation-Interim Report 2018 (March 16, 2018).
13
For examples of existing work, see International Monetary Fund, "Chapter 3: Understanding
the Downward Trend in Labor Income Shares," World Economic Outlook April 2017 (IMF, 2017);
and G. Michaels, A. Natraj and J. Van Reenen, "Has ICT Polarized Skill Demand? Evidence from
Review of Economics and Statistics
Eleven Countries over Twenty-Five Years," 96, no. 1 (March
2014): 60-77
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Social goals can support economic goals
This leads me to my second challenge. We need to reject the idea that there is
an inevitable trade-off between social and economic goals. Human well-being is
needed for economic growth, and the reverse is often true as well. There's
growing evidence that lower levels of inequality may make the economy less
vulnerable to financial crises or periods of stagnation.14
Quebec's
public daycare system is a prominent example of a policy that creates
a virtuous circle between social and economic goals: it helped families and also
women's
increased participation in the labour force. In fact, it helped transform
Quebec from a province with one of the lowest participation rates among
primeage women to a national leader in this regard.15
There are other examples, including the public policy response to the pandemic.
Wage subsidies are helping maintain relationships between workers and
employers, which in turn protects future growth. Canada could also be made
more resilient through policies that encourage equity rather than debt financing
as a way to foster business creation and growth and support vibrant
communities.
sector can't do it alone
The public
My third challenge to conventional wisdom is the realization that this is not only a
public sector problem to solve. We need private sector investment in
growthenhancing initiatives and smart incentives to go along with that.
Investment in green technology is just one example of how the private sector can
Canada's oil and gas sector has shown
pitch in to support longer term growth.
tremendous capacity to innovate in the face of challenges and is making great
strides in developing new technologies to reduce emissions. Think of
investments in cogeneration technologies-an innovation that increases
efficiency and competitiveness while also reducing carbon footprints.16 And
financial firms are working to develop the market for green and transition bonds
to increase financing options for climate-related projects.
We've also seen some good examples of stakeholder capitalism
in response to
the pandemic as the private sector found ways to support growth. Many financial
institutions stepped up to allow deferrals in loan and mortgage payments. This
14
P. Pascal, "Historical
Among others, see Patterns of Inequality and Productivity Around
Financial Crises," Federal Reserve Bank of San Francisco Working Paper No. 2017-23 (March
"Inequality and
2020); and A. G. Berg and J. D. Ostry, Unsustainable Growth: Two Sides of the
Same Coin?"
International Monetary Fund Staff Discussion Note No. 11/08 (April 2011). See also
"U.S. Economic Prospects: Secular Stagnation, Hysteresis and the Zero Lower
L. H. Summers,
Business Economics
Bound," 49, no. 2 (April 2014): 65-73.
15
"Impact of Quebec's Universal
For details, see P. Fortin, L. Godbout and S. St-Cerny, Low-Fee
Childcare Program on Female Labour Participation, Domestic Income, and Government
Budgets," Working Paper; and B. Petersson, R. Mariscal and K. Ishi, "Women Are Key for Future
IMF Working Paper No. 17/166
Growth: Evidence from Canada," (July 2017).
16
For more information, see "7 Facts on the Oil Sands and the Environment," Natural Resources
Canada, March 15, 2019.
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complemented public sector actions to help families weather income loss and
also allowed banks to avoid some loan losses.
Bank's
The stake
We can't
raise growth on a sustainable basis without economic stability, and we
know that recessions tend to hit hardest those who can least afford it. The
COVID-19 experience is no exception.
That's where the Bank comes
in. Our mandate is to promote the economic and
financial welfare of Canada. For us, that means targeting low, stable and
predictable inflation and supporting financial stability.
For nearly 30 years, our success in achieving our 2 percent inflation target has
provided a solid foundation for growth and more certainty for businesses and
families as they plan their finances and investments. This target is part of an
agreement with the federal government that has been reviewed every five years
since 2001.
the review that's underway
In right now, my colleagues and I chose to challenge
the conventional wisdom that our current regime is still the best we can do.
While we have some results from our research on alternative frameworks, we still
need to consider comments we've received from experts as well as feedback
It's too early to draw firm conclusions, but
from our online survey.17 you can be
sure that when we settle on an agreement with the government next year, it will
be clear why we think it is in the best interest of Canadians.
The Bank also supports the stability of the financial system. One of the ways we
do that is with our analytical work on risks to the financial system linked to
climate change. We have been working with experts here at home, and globally,
to develop a set of climate scenarios to better understand potential
climaterelated risks and opportunities for the Canadian financial sector. Knowing what
the future could look like under different scenarios helps all of us prepare for
what's
ahead.
Another way we support the financial system is through our work on core
financial market infrastructure. State-of-the-art payments systems are key to the
why the
competitiveness of Canadian businesses and to financial stability. That's
We've also
Bank has been working with Payments Canada to modernize them.
stepped up our work on a central bank digital currency given that COVID-19 has
We're
accelerated the use of digital payments. early in the technical development
phase in collaboration with the private sector, other central banks and the Bank
for International Settlements. While no decision has been made yet on whether
to issue a digital currency, both universal accessibility and financial stability are
key objectives.
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Conclusion
Time to conclude.
It's not lost on me that I'm
urging exploration of the far side of the moon-life
post-pandemic-while life here on earth is still difficult. The COVID-19 pandemic
remains a formidable obstacle to both our health and economic prosperity. We
can't have
one without the other. Governments are acting decisively, and
monetary policy is complementing these actions by creating financial conditions
that support growth.
It's not too early
for an open discussion about life after COVID-19. The pandemic
has damaged the potential for Canada, and other countries worldwide, to
generate sustainable economic activity. We need to set our sights higher to help
businesses create good jobs and to make high debt loads more manageable. We
need to recognize that social and economic goals are often self-reinforcing, not
conflicting. This applies to many public and private initiatives, whether they are
designed to green the economy, promote investment in critical infrastructure and
technology, or help workers succeed in the labour market.
It's been
heartening to see that the pandemic has brought Canadians together in
We've been forced
many ways, despite our important differences. to adapt
Let's
quickly on many fronts. use that impetus to propel us in a better direction-
toward investments that boost sustainable and inclusive growth in the long term.
Like the explorers all those years ago, we will find light on the far side of the
moon. In this case, however, how brightly it shines depends on us.