stephen s poloz : life after liftoff – divergence and us monetary policy normalization remarks by mr stephen s poloz, governor of the bank of canada, at the mayor ’ s breakfast series, ottawa, ontario, 7 january 2016. * * * i would like to thank bob fay and mark kruger for their help in preparing this speech. introduction good morning, and happy new year to all. here we are at the beginning of 2016, almost eight years after the global financial crisis, which spawned the most synchronized worldwide economic downturn in history. a rerun of the great depression of the 1930s was averted, but the recovery has been anything but synchronized. in fact, the dominant theme across the global economy has become “ divergence. ” at one end of the spectrum, the u. s. federal reserve has just started its interest rate normalization process after seven years of keeping its policy rate near zero. at the other end, the european central bank ( ecb ) recently cut its deposit rate to negative 0. 3 per cent. other central banks also cut rates in the past year, including the bank of canada. it is very important that we understand the reasons for these policy divergences. on one level, they simply reflect actions taken by central banks tailored to their own economies. but the underlying forces acting on the global economy are powerful, slow moving and affect various economies differently. this means that the theme of divergence – both financial and economic – is likely to remain with us for some time to come. financial divergence the recent move by the federal reserve is the first step in a long and measured process of policy normalization. this is a welcome development because it means that the u. s. recovery has largely put behind it the conditions that led to the financial crisis. while this normalization process will be tailored to the u. s. economy, it will have implications for canada. one effect we can expect to see over time is a decompression of global term premiums. let me put that in plain language. central banks such as the fed, the ecb, the bank of england and the bank of japan have used large - scale asset purchases ( or quantitative easing, if you prefer ) and other unconventional policies, such as forward guidance, to help push longer - term interest rates lower. this has given monetary policy a broader - based stimulative impact on the economy. investors have demanded less of a premium to hold debt for a

therefore means that the country ’ s income is increasing. a falling terms of trade, on the other hand, means less income for the country overall. as a major exporter of resources, canada saw its terms of trade move sharply higher from 2001 through 2008, and this was largely maintained until mid - 2014. since then, however, falling world prices for oil and other commodities have reversed much of that rise. measured at annual rates, this represents a loss of more than $ 50 billion in national income, or about $ 1, 500 for every canadian. this shock is leading to significant and complex economic adjustments in canada – in effect, a reversal of the forces that drove our economy during the years when resource prices were rising. to help understand these forces, let ’ s recall what happened to the economy during the period of rising oil prices. back in 2002, when oil prices were around us $ 25 per barrel, investment in the oil and gas sector represented about 17 per cent of total business investment here in canada. by 2014, that figure had jumped to 30 per cent. the share of oil and gas in canada ’ s merchandise exports almost tripled over that same period. this rise in the importance of our energy sector was a natural response to higher prices for oil – because the world was offering more for each barrel, we invested more in our capacity, and more canadians moved to work in the oil patch. this is also why the impact of the sudden drop in oil prices has been so large. net importers of natural resources, such as the united states and europe, are seeing the opposite phenomenon. their overall income is now higher because import prices are lower relative to their export prices. but other commodity - intensive economies, such as australia, mexico, chile and brazil, are working through conditions similar to those here in canada. of course, most countries have a diverse domestic economic structure. certainly, that is the case here in canada. so, just as we see divergence in economic performance between countries in response to lower resource prices, so, too, we see divergence within canada, among our different sectors and geographic regions. for example, the unemployment rate in the energy - intensive provinces – alberta, saskatchewan, and newfoundland and labrador – has risen more than two percentage points since november 2014, while it has remained unchanged in the rest of the country. this bis central bankers ’ speeches divergence is also evident in consumer spending. for example, motor vehicle sales have fallen by about 10 per cent