Economist discusses Canada’s economic outlook

[00:00:00] Speaker 1: back there's been a lot of talk about Canada's economy that it's in a fragile situation growth largely flat with governments running record deficits Don Drummond is a senior Canadian economist fellow in residence at the CD Howe Institute he's at Queen's University he's a former chief economist at TD Bank we could use the entire interview time to list different positions and accomplishments you had but instead I'll just say welcome it's good to have you thank you very much you spoke in Halifax today on the matter of investment taxation and growth in Nova Scotia in particular the province has a lot of one of those things taxation how about the other two [00:00:42] Don Drummond: well I must confess I started out with a particular message that we should all be very concerned as Canadians we have always been concerned about our weak productivity and we've had that problem for quite some time but now we have the second shock of the trade uncertainty with the United States and a quarter of our economy is exports and 76% of our merchandise goes to that one economy and even if Trump wakes up tomorrow and said I wasn't really serious I'm not going to do it that trust has been broken and companies and people are making an investment decision so we have to very very quickly change our model and this is going to take more than just doing taxes tax has to be part of it but we're going to have to do a lot more than just the taxes and it's intriguing and particularly in the context of Nova Scotia because there was a growth commission in Nova Scotia more than a decade ago and I recently refreshed my memory of it and it could be written again today it was exactly the same thing yeah and it said we need to shift away from corporate and personal income taxes towards indirect taxes we need to lower the corporate tax rate we need to improve some of the tax credits and well all those things things today we need to streamline or reduce regulation and it really comes back to that context why didn't those things happen is because no one particularly politicians perceived that they needed to do it because life was fine without doing it and my message was life is not fine and this is what upsets me with the bank of Canada where they assume Kuzma will be renegotiated and it'll be smooth well that's that's my next question for you written an opinion [00:02:15] Speaker 1: piece in the Globe mail which you which you came right out and said look at the the forecast by the Bank of Canada to rosy and you know based on on trade and and you think they're looking at it that Kuzma will be renegotiated it's a matter of fact that it will happen and things will largely be smooth and you don't you don't buy that they don't word it exactly that way but the implication is clear they say that they assume the [00:02:41] Don Drummond: trade uncertainty will diminish well that's code for saying the process will be smooth who in the world and Canadian would think that the process is going to be smooth we have a volatile outbreak outbreak from the president virtually every single day it's going to be 50% on on aircraft today it's going to be 100% if we do a trade deal with China you know there's going to be a tariff on bathroom vanities and there's not going to be a tariff on bathroom vanities how does that lead to any assumption this process is going to be smooth? [00:03:22] Speaker 1: are you looking at lowering rates again? [00:03:24] Don Drummond: I think in that uncertainty they could probably hold off in fairness to them the economy while it is somewhat weak it hasn't fallen apart there has been actually some employment gains of late and we do have a pesky little inflation issue it's come down an awful lot but the underlying rate of inflation that they track are still running around two and a half percent now I think they will continue to come down it will be okay but we have to remember levels do matter their policy rates 2.25% and people who are younger think well that's kind of high because it was a lot lower than that somebody who's a little bit older looks at the historical record 2.25 by the base of history is a very low rate our 10 year bond yield is just over 3% they have typically been 6 to 8% historically so those are already pretty low and then finally as the governor as I said there's not much they can do on monetary policy to overcome a structural shock [00:04:21] Speaker 1: some analysts believe that we could still be on the precipice of recession [00:04:28] Don Drummond: the recession issue is not even the one I worry about because when you go in recession you go down you come up fairly quickly and yes they're painful and they hurt a lot of people but three or four years down the road you're kind of back where you were before I worry about a permanent loss of income if we lose export markets particularly a locative export market like the United States and we're not able to make that up our level of income will be lower not just for one or two quarters which would qualify a recession but for a very long time going forward and Bank of Canada speak our potential growth rate will be lower our permanent unemployment rate will be higher that's what I worry about and just the short term and obviously that would have an [00:05:04] Speaker 1: effect on the type of services that Ottawa could offer we already have big deficits we got a debt [00:05:10] Don Drummond: to GP ratio that's over 40 percent and we just had a parliamentary budget report said today if they satisfy the defense commitment that's going to add another six percentage points so in the budget they showed the debt to be ratio coming down a little bit add in the defense that actually it wouldn't come down at all it would go and as I did a sensitivity analysis all you have to take is a hundred basis points higher interest rates and it goes up a lot okay well Ottawa's got this [00:05:33] Speaker 1: massive deficit but we have very big deficits in all three maritime provinces here does the public care does it like the numbers are so big does it resonate well and also to some degree they've [00:05:46] Don Drummond: bought the line the federal government keeps touting we're in better shape than the others and it's like somebody else being really really sick and you're only somewhat sick you're still sick the United States has got a deep problem and they're paying a price for that we have typically had higher interest rates in Canada the United States now our interest rates are lower our bar tenure bond yields a hundred basis points lower than as the United States we've seen the steady erosion on the value of the US dollar because they're moving out of US denominated assets so we we can't look at we're better shaped than these other basket cases therefore we shouldn't worry about it I got about 30 seconds here when looking at [00:06:24] Speaker 1: deficits we already hear from young people that they they don't even think that they're ever going to get into the housing market this obviously these deficits are going to take when we do get to the position to start paying them down it can take a very long time probably on the backs of the next [00:06:37] Don Drummond: generation what's the risk in that well it's patently unfair to young people so when they graduate from university they're having tough time getting permanent good jobs in the labour market right now they can't afford a house a starter house and many of the urban centers on Canada are a million plus even of interest rates are low they can't afford the debt on that you look at things like the Canada pension plan their contributions are higher than the value because older people like me didn't pay what they should have paid they paid what they're asked to pay but it wasn't enough and it's just a heavy burden on them we're not passing very much on to them by way of public assets to offset that and so we're making their life difficult and it's going to continue to be difficult that's why we [00:07:16] Speaker 1: have to cap the debt uh don drummond great to have you in lots to think about thank you for that thank you we'll take a break we'll be back with much more of your newscast after this