agathe cote : the promise of potential remarks by ms agathe cote, deputy governor of the bank of canada, to the cfa society winnipeg / manitoba chambers of commerce, winnipeg, manitoba, 29 october 2013. * * * accompanying charts can be found at the end of the speech. introduction thank you. it is a great pleasure to be here. i want to talk today about potential, a word that speaks optimistically to the future – to what can be. it ’ s a word that means different things to different people under different circumstances. it ’ s an abstraction : a concept that promises a road leading to success. that is the finish line – the promised destination. getting there is another story. the way forward is seldom direct and reaching potential is a trajectory where the journey is as important as the destination, especially for the “ dismal ” science of economics. we can think of canada ’ s economic potential as where we can be if we do our best and make all the right decisions. it is what we can hope to achieve over the longer run. since potential output growth is key to a country ’ s standard of living, it should be of interest to all of us. consider this : if potential output were to grow by an extra percentage point every year for the next ten years, the cumulative increase in income would be almost $ 30, 000 for every canadian. at the bank of canada, we care about potential output for two reasons. first, the growth rate of potential output sheds light on the prospects for our country ’ s economic growth. second, the difference between the level of actual and potential output – or the output gap – is a key measure of inflation pressures. and keeping inflation at the 2 per cent target rate is the best contribution that monetary policy can make to the financial well - being of canadians. the bank ’ s assessment of the current output gap and the projected growth of potential output have a direct bearing on the bank ’ s inflation outlook and monetary policy decisions. other things being equal, a larger degree of slack in the economy implies a greater need for monetary policy stimulus. as well, the higher the projected growth rate of potential output, the higher the economy can grow without stoking inflation. 1 each year in october, the bank reviews its estimates of potential output. i will share with you some of our findings and what we think they say about the journey canada ’ s economy is taking. although canada came out of the recession earlier and recovered faster

to the ottawa economics association, 24 march 2010 ) ; t. macklem, “ a measure of work ” ( speech to the winnipeg chamber of commerce, 4 october 2012 ) ; and “ canada ’ s competitive imperative : investing in productivity gains ” ( speech to productivity alberta, 1 february 2011 ). bis central bankers ’ speeches become more noticeable. we are getting older, living longer and having fewer children. 5 baby boomers are retiring or reducing the amount of hours they work and lower fertility rates over the past 20 years means that more people are leaving the workforce than entering it. while net immigration is important, and currently accounts for half of the population growth in canada, it cannot stop the labour force deceleration. other factors, besides demographics, are evidently affecting labour input, but their impact on the trend is harder to discern. for instance, the recession affected both the demand and supply of labour. on the one hand, firms cut back on hiring and hours worked diminished. on the other hand, individuals looked to work more to make up for lost wealth and income. it is unclear to what degree these two factors offset each other in terms of the trend and how persistent they are. the bank ’ s estimates assume that, on balance, the recession had little impact on trend labour input growth. 6 taking stock to sum up, productivity growth was on a downward trend going into the recession and the recession exacerbated this trend. largely as a result, the growth rate of potential output is estimated to have declined from above 3. 5 per cent in the late 1990s to about 1. 5 per cent in 2009. with output well below potential during the recession, the amount of excess supply grew to as much as 3. 5 to 4. 5 per cent. thanks to strong domestic demand, canada recovered fairly rapidly from the recession and registered solid growth in 2010 and 2011. as production increased and business investment accelerated, we estimate that trend labour productivity growth has slowly increased, leading to a pickup in potential output growth to about 2 per cent in the past year. while our estimates suggest that the economy was getting close to potential in late 2011, slower growth since then has led to a significant buildup of excess capacity. taking into account a range of indicators and models, the bank judges that the amount of slack today is between 1 and 2 per cent. given the enormous complexity in estimating potential output, it is no surprise that the various indicators monitored by the bank suggest a range, rather than