promoting canada’s economic and financial well-being in ...promoting canada’s economic and...
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Promoting Canada’s Economic and Financial Well-Being in an Uncertain WorldgRemarks to the Thompson Chamber of CommerceThompson ManitobaThompson, Manitoba 17 November 2011
Jean BoivinJean Boivin Deputy GovernorBank of Canada
Outline
Economic Outlook
T ki St B k R i t RTaking a Step Back: Recession to Recovery
The Bank’s Four Key Responsibilities:The Banks Four Key Responsibilities:– Monetary policy– Financial stabilityy– Funds management– Currency
2
Economic OutlookEconomic Outlook
3
Europe: Mild recession—modest recoveryIndexEuro area real GDP across economic cycles; start of recession = 100 quarterly data
125
130
135IndexEuro-area real GDP across economic cycles; start of recession = 100, quarterly data
Start of the recession
110
115
120
Years after the start of the recessionYears before the
t t f th i
95
100
105
start of the recessionstart of the recession
-2 -1 0 1 2 3 4 5 690
Range of past recessions (1980 onward) The Big Five modern financial crisesCurrent cycle Base-case projection
Note: The Big Five modern financial crises as described in Reinhart and Rogoff (2008) are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). See C.M. Reinhart and K.S. Rogoff, "Is the 2007 U.S. Sub-Prime Financial Crisis So Different? An International Historical Comparison," American Economic Review: Papers and Proceedings 98, no. 2 (2008): 339-44Sources: Eurostat and Organisation for Economic Co-operation and Development
Current cycle Base-case projection
4
United States: Subdued growth in line with recoveriesUnited States: Subdued growth in line with recoveries following severe financial crises
IndexU S real GDP across economic cycles; start of recession = 100 quarterly data
125
130
135U.S. real GDP across economic cycles; start of recession = 100, quarterly data
Start of the recession
115
120
125
Years after the start of the recessionYears before the
start of the recession
100
105
110
-2 -1 0 1 2 3 4 5 690
95
5
Range of past U.S. recessions (1948 onward) The Big Five modern financial crisesU.S. current cycle Base-case projection
Sources: U.S. Bureau of Economic Analysis and Organisation for Economic Co-operation and Development
Rebuilding wealth in the United States will take timeUS$ billions
7000
8000
US$ billions
4000
5000
6000
2000
3000
4000
0
1000
Wealth lost since 2007 peak Annual savings at current rates
Sources: U.S. Bureau of Economic Analysis, U.S. Federal Reserve and Bank of Canada calculations
6
October MPR: Commodity prices and Canadian dollar hadOctober MPR: Commodity prices and Canadian dollar had fallen, but were still elevated
Monthly data: Bank of Canada commodity
380
420
IndexMonthly data: Bank of Canada commodity price index
1.10130
US$
Daily data: Canadian dollarIndex
July Report
260
300
340
0.95
1.00
1.05
110
120
July Report
180
220
260
0 80
0.85
0.90
100
110
2005 2006 2007 2008 2009 2010 2011100
140
2008 2009 2010 20110.75
0.80
90
CERI: Canadian-dollar effective exchange rate index (against U.S. dollar, euro,
7
All commodities (US$)
Non-energy commodities (US$)
Crude oil (US$) Last observation: October 2011
CERI: Canadian dollar effective exchange rate index (against U.S. dollar, euro, yen, U.K. pound, Mexican peso and Chinese renminbi) (left scale, 1992 = 100)Closing spot exchange rate for Canadian dollar vis-à-vis U.S. dollar (right scale)
Last observation: 21 October 2011Source: Bank of Canada Source: Bank of Canada
Stimulative credit conditions
S r e res lts s ggest that credit conditions for Borrowing costs remain at exceptionally low levels
100
%
Survey results suggest that credit conditions for Canadian non-financial firms eased further in 2011Q3Balance of opinion
6.5
7.0
%
Borrowing costs remain at exceptionally low levelsWeekly data
40
60
80Tightening
5.0
5.5
6.0
-20
0
20
3.5
4.0
4.5
-60
-40
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
O ll dit diti f th B i O tl k S **
Easing
2007 2008 2009 2010 20112.5
3.0
8
Overall credit conditions from the Business Outlook Survey**
Overall business-lending conditions from the Senior Loan Officer Survey*
Last observation: 2011Q3
Effective business interest rate
Effective household interest rate
Last observation: 21 October 2011Source: Bank of Canada calculations Source: Bank of Canada calculations
Domestic demand projected to be weaker but remains theDomestic demand projected to be weaker, but remains the primary driver of growth
Percentage pointsContributions to real GDP growth
4
6
Percentage pointsContributions to real GDP growth
3.2
2 1 2 9
0
2
2.11.9
2.9
-2.8
-4
-2
2009 2010 2011 2012 2013
-6* *
9
Inventories Net exports Government Business fixed investment Housing Consumption GDP•Indicates projectionSources: Statistics Canada and Bank of Canada calculations
Total CPI and core inflation to decline in 2012 returning toTotal CPI and core inflation to decline in 2012, returning to 2 per cent by the end of 2013
%Year over year percentage change quarterly data
3
4
%Year-over-year percentage change, quarterly data
0
1
2
2007 2008 2009 2010 2011 2012 2013
-2
-1
Control rangeTargetCore CPI*Total CPI excluding effects of the HST and changes in other indirect taxesBase-case projectionp jBase-case projection for total CPI excluding effects of the HST and changes in other indirect taxesTotal CPI
10
*CPI excluding eight of the most volatile components and the effect of changes in indirect taxes on the remaining componentsSources: Statistic Canada and Bank of Canada calculations and projections
Risks
Main upside risks
– More persistent global inflationary pressures
Stronger than expected momentum in household expenditures in– Stronger-than-expected momentum in household expenditures in Canada
– More decisive policy actions in major advanced economies
Main downside risks
– Failure to contain the crisis in Europe
– U.S. recession would have material adverse consequences in Canada
– Sharper-than-expected deceleration in household spending in Canada
Risks to the inflation outlook in Canada are roughly balanced
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Economic outlook: Manitoba
Private sector forecasts: Moderate growth averaging 2.2% in 2011 and 2.3% in 2012. Global weakness will dampen growth i f t i tin manufacturing sector.
Employment is relatively flat, but the labour market remains tight. Wage gains have been strong.
Adverse weather and flooding early in year are expected to g y y plower crop yields.
Overall the mining sector (non-energy and energy mining) isOverall, the mining sector (non energy and energy mining) is still contributing to growth.
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GDP growth in ManitobaAnnual GDP growth
4 0%
5.0%
Annual GDP growth (per cent)
3.0%
4.0%
Private sector forecast
1.0%
2.0%
-1.0%
0.0%
13
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011** 2012**
** Mean of Private Sector Forecasts for ManitobaSources: Statistics Canada,
Taking a Step Back: Recession to RecoveryTaking a Step Back: Recession to Recovery
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The Great Recession in Canada
Sharp decline in economic activity in G-7 countries
Rapid increase in number of unemployed: roughly 30 million globally – almost equal to the entire population of Canada
Canada not epicentre of crisis, but contagion spread quickly to Canada
15
A milder recession in CanadaReal GDP Inflation rates
105
IndexReal GDP2007Q1 = 100, quarterly data
5
6
%Inflation ratesYear-over-year percentage change in total CPI, monthly data
101
103
2
3
4
97
99
-1
0
1
2007 2008 2009 2010 201195
97
2007 2008 2009 2010 2011
-3
-2
16
Canada United States Euro area
Last observation: Q2 and Q3 2011Sources: Statistics Canada, U.S. Bureau of Economic Analysis,and Eurostat
Canada United States Euro area
Last observation: September 2011Sources: Statistics Canada, U.S. Department of Laborand Eurostat
Not worse than the most recent recessions... Real GDP in Canada
102
104
IndexReal GDP in CanadaComparison of real GDP across economic cycles; quarter before the downturn in real GDP = 100, quarterly data
98
100
102
96
98
Years before th d t
Years after the d t
-1 0 1 292
94the downturn downturn
17
Current cycle 1990-92 cycle 1981-82 cycle
Sources: Statistics Canada and Bank of Canada calculations
... but exports take a significant hitComparison of real exports across economic cycles;
115
120Index
Comparison of real exports across economic cycles; quarter before the downturn in real GDP = 100, quarterly data
100
105
110
90
95
100
Years before the downturn Years after the
-1 0 1 280
85downturn
18
Current cycle 1990-92 cycle 1981-82 cycle
Sources: Statistics Canada and Bank of Canada calculations
A resilient household sectorComparison of real consumption across economic cycles;
104
106
IndexComparison of real consumption across economic cycles; quarter before the downturn in real GDP = 100, quarterly data
100
102
104
98
100
Years before th d t
Years after the d t
-1 0 1 294
96the downturn downturn
19
Current cycle 1990-92 cycle 1981-82 cycle
Sources: Statistics Canada and Bank of Canada calculations
Canada’s policy rate during the Great Recession%Monthly data
4
5%Monthly data
Conditional commitment
3
April 2009 to mid- 2010
Conditional on the outlook for inflation
1
2
2005 2006 2007 2008 2009 2010 20110
20
Target for the overnight rateLast observation: October 2011Sources: Statistics Canada and Bank of Canada
The Bank of Canada’s Four Key ResponsibilitiesThe Bank of Canadas Four Key Responsibilities
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Mandate
The Bank of Canada’s mandate is to contribute to the economic well-being of Canadians:
through monetary policy aimed at keeping inflation low, stable and predictable
promoting a stable and efficient financial system
providing banking services to the federal government and key g g g yfinancial system players
supplying secure, quality bank notes
22
Key responsibilities: Monetary policy
Our objective: to foster confidence in the value of money by keeping inflation low, stable and predictable
A means to an end – a stable, well-functioning economy
Allows consumers, businesses, and investors greater certainty , , g yabout future purchasing power of savings and income
Lowers nominal and real interest rates
Encourages more stable economic growth and lower, less-variable unemployment
23
Flexible inflation-targeting regime
Since 1991, Bank of Canada has targeted inflation under an agreement with Government of CanadagAgreement renewed last week for five yearsKey elements of Canada’s monetary policy framework:
–Symmetry–Flexibility
Fl ibl h t–Flexible exchange rate
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Monetary policy: Low and stable inflationCPI annual averages year over year percentage change
12
14%CPI annual averages, year-over-year percentage change
8
10
2
4
6
1980 1985 1990 1995 2000 2005 20100
2
25
Total CPI Core CPI Control range Target
Note: Data for 2011 are current to SeptemberSource: Statistics Canada
Key responsibilities: Financial system
Our objective: To promote the stability and efficiency of the financial system, in Canada and globallyBank of Canada collaborates with other federal regulatoryplayers and international partners
Bank of Canada:No direct regulatory role, other than oversight of systemically important market infrastructurespCollaboration through various committees (e.g., FISC, SAC, HoA)Lender of last resort
26
Extraordinary liquidity support in response to the crisis
W kl l t t di t B k f C d li idit f iliti
40
45
Can$ billionsWeekly par value outstanding at Bank of Canada liquidity facilities
25
30
35
10
15
20
December 2007 June 2008 December 2008 June 2009 December 2009 June 2010 December 20100
5
27
Term Loan Facility Term PRAs for Private Sector Instruments Term purchase and resale agreements (PRAs)
Last observation: 30 December 2010Source: Bank of Canada
Key responsibilities: Funds management
O bj i T id ff i b ki i hOur objective: To provide effective banking services to the federal government and key financial system players. This involves:
managing Canada’s foreign exchange reserves, the federal government’s cash balances and federal debt infederal governments cash balances and federal debt in collaboration with the Department of Finance
administering the Canada Savings Bonds programadministering the Canada Savings Bonds program
providing the means of final settlement of daily flows of payment among financial institutionspayment among financial institutions
28
Key responsibilities: Currency
Bank notes are the central bank’s most tangible product
The Bank of Canada is responsible for ensuring that Canada’s bank notes are readily accepted and secure from counterfeitingcou e e g
29
Secure, quality bank notesCounterfeit Canadian bank notes detected for each one million genuine notes outstanding
450
500
Parts per million
Counterfeit Canadian bank notes detected for each one million genuine notes outstanding
300
350
400
150
200
250
0
50
100
30
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Last observation: 2010Source: Bank of Canada
Transparent, holographic polymer bank notes
More secure, more economical, better for the environment
31
New bank notes—training
70,000 police officers and 5 million cash handlers need education
Goal: reach 60 per cent of cash handlers in cash-intensive organizations byGoal: reach 60 per cent of cash handlers in cash intensive organizations by 2013
– Banks
– Gas stations
– Convenience stores
– Fast-food merchants
– Top retail organizations —1,200 cash-intensive companies often the target of counterfeiters
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Bank of Canada Regional Director
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Leo LedohowskiBoard Member
Board of Directors
Bank of Canada Regional Representatives
Alexander FritscheSenior Regional Representative
Ted MieszkalskiSenior Regional Representative
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Senior Regional Representative(Economics)
Calgary
Senior Regional Representative(Currency)
Calgary
Thank youThank you
35