Bank of Canada: Economy needs more capacity investment, not stimulus

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FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa

By Julie Gordon and David Ljunggren

OTTAWA -Canada’s economy does not need more stimulus, but rather more investment from both government and businesses to build up supply capacity to meet strong consumer demand, Bank of Canada Governor Tiff Macklem said on Wednesday.

Macklem, when asked in an audience Q&A session if government should be spending to further stimulate the economy, said Canada is already in the midst of a consumer-led recovery, and more capacity investment is needed to sustain that.

“To sustain a strong consumer-led recovery, you need investment,” he said. “Whether it’s businesses or governments, what we need is more focus on building that supply capacity.”

“Demand is now looking self-sustaining,” he added.

Canadian Prime Minister Justin Trudeau during his election campaign last year pledged C$78 billion https://www.reuters.com/article/us-canada-election-idCAKBN2FX3M7 ($62 billion) in new spending over five years to foster Canada’s economic rebound.

Macklem said that with inflation well above the central bank’s 2% target, productivity growth was more vital than ever. Businesses can help increase productivity by investing in new technology to boost efficiency, he said.

“For the economy as a whole, investment is critical to non-inflationary growth,” he said.

If Canadian businesses fail to go ahead with planned investments, it could impact the path of rate increases, he later told reporters.

“If productivity growth is weaker, that means we’re going to have less growth in potential output in the economy, less expansion of our supply capacity and, other things equal, that means that interest rates would have to go up more,” he said.

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PRODUCTIVITY LAGS

Despite a stronger rebound in employment than seen in the United States, Canada’s productivity growth continues to lag. This is both due to more public health restrictions and lower business investment, said Macklem.

“The question is, does COVID-19 provide us with an opportunity to change our course? I believe it does,” said Macklem, pointing to the pandemic-driven rise in digital investments and remote work.

Corporate balance sheets are strong, consumer demand is high and U.S. demand for Canadian exports is rising, with investment intentions among firms at their highest level since 1999, Macklem said.

The central bank signaled last month it would soon start hiking rates https://www.reuters.com/business/finance/hike-or-not-its-toss-up-ahead-bank-canada-rate-decision-2022-01-26, saying the economy no longer needed pandemic-level supports. Money markets see the first increase in March, with six in total this year. [BOC WATCH]

The Canadian dollar was trading 0.3% higher at 1.2670 to the greenback, or 78.93 U.S. cents.

($1 = 1.2669 Canadian dollars)

(Reporting by Julie Gordon and David Ljunggren in Ottawa; Additional reporting by Fergal Smith in Toronto; Editing by Alex Richardson, Kirsten Donovan and Mark Porter)

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