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Stephen Poloz, Special Advisor, Osler, Hoskin & Harcourt LLP, Former Governor of the Bank of Canada


Canada is working its way through COVID-19 disruptions, but the pandemic is accelerating “tectonic” forces on the global economy that could spark more volatility, said Stephen Poloz, the former governor of the Bank of Canada.

“It’s as if a bomb has gone off in our economy and a gigantic crater has opened up in front of us,” said Mr. Poloz, now a special advisor at law firm Osler, Hoskin and Harcourt LLP.

He was the keynote speaker at Franklin Templeton’s 2021 virtual Global Investment Outlook, held last month, at which the investment firm’s money managers outlined their view that global growth will rise in 2021. They foresee emerging markets leading the way, but that investors should be prepared for increased market volatility.

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Mr. Poloz said the path ahead for governments and central banks is to continue to bolster the economy with fiscal stimulus, and then gradually take that away as the recovery gains strength.

“How do we move forward? One way would be to walk down into the crater, cross the bottom and walk up the other side. That would take years and it would amount to a repeat of the Great Depression of the 1930s,” Mr. Poloz said.

What central banks and governments have done instead is fill the crater, he explained.

“With all that liquidity in the crater, we can row our boats to the other side. Once we’re there, then the central banks can withdraw all that excess liquidity.”

Central banks will be able to manage this transition, but other monumental economic forces lurk in the shadows, he said.

Canada entered the pandemic with a healthy economy and is well-positioned to weather the storm, he added.

“Naturally, we’re all preoccupied with the impact of COVID-19, a natural disaster of the first order, but as investors, we need to look beyond [the pandemic],” Mr. Poloz said.

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There are “tectonic” forces shifting beneath the surface, he said. The aging population, growing indebtedness, technological progress, rising inequality and climate change have longer-term potential to disrupt the economic landscape than the pandemic, Mr. Poloz said.

“Their interaction can give rise to sudden, earthquake-like eruptions of economic and financial volatility,” said Mr. Poloz, who was governor of Canada’s central bank from 2013 to June, 2020.

Aging population

The global population is aging, “because we’re in the back half of the post-war baby boom. We came, we worked, we retired,” Mr. Poloz said. “This means that the high real interest rates that we’ve observed in the past 40 years were an aberration in the grand sweep of history.”

The Bank of Canada suggests the natural rate of interest is between -0.25 and 0.75 per cent. If markets expect inflation to return to around 2 per cent, then bond yields would normalize around 2 per cent or higher, eventually, Mr. Poloz said.

Some worry about an inflation outbreak.

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“The fact that governments are borrowing staggering amounts of money and central banks are accommodating it puts substance behind this concern,” he said. “In this situation, however, we need what appear to be inflationary policies just to counteract the deflationary forces that are acting on the economy.”

Growing indebtedness

The global accumulation of debt was an issue long before COVID-19, Mr. Poloz said.

Monetary and fiscal policies prevented recessions through lower interest rates and fiscal expansion, but resulted in growing indebtedness among households, companies and governments.

The International Monetary Fund (IMF) expects global governments will borrow 100 per cent of global gross domestic product (GDP) this year or more – a level not seen since the end of the Second World War.

Under normal circumstances, rising government debt over time can lead to low interest rates, dampened growth, lower investment returns and potentially higher taxes.

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Technological progress

At the same time, the fourth industrial revolution is underway with the digitization of the global economy and the deployment of artificial intelligence.

“There is widespread belief that a few large firms will scoop up the economic benefits and leave ordinary workers more stressed than ever, just as occurred in the past,” Mr. Poloz said.

One consequence of this technological progress has been growing income inequality, he pointed out.

“Accordingly, we face what I see as a toxic confluence of rising indebtedness, technological progress, increasing income inequality and emergent political populism,” Mr. Poloz warned. “COVID-19 is accelerating all these trends.”

At the same time, climate change is spurring widespread efforts to reduce the corporate carbon footprint, including through automation, he said. This could result in higher costs and, potentially, job losses.

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Market volatility

“I hope I’ve made the case for you that volatility beyond the norm is now a given,” Mr. Poloz said. “The tectonic forces acting on the global economy are leading to combinations never experienced before.”

In a question-and-answer session moderated by former Globe and Mail columnist Jeffrey Simpson, Mr. Poloz was asked about the federal government’s $381-billion deficit.

“I do think the things that are being done are essential in the context we find ourselves in,” he said.

These support programs were designed to expand or contract as necessary “and that elasticity means there is an automatic stabilization property.”

William Yun, CFA, Executive Vice President, Franklin Templeton Investment Solutions



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Outlining views from Franklin Templeton’s 2021 Capital Market Expectations report, William Yun, executive vice-president of Franklin Templeton Investment Solutions in New York, said the firm expects modest global growth in inflation, as well as a continued low-interest-rate environment. However, that path to growth may not be smooth.

“We anticipate that there is certainly the potential for higher market volatility over the medium-term,” he said.

In terms of asset class performance, Franklin Templeton expects developed market equities will outperform bonds. As well, emerging markets will have higher returns than developed markets in both equities and fixed income.

“We do expect global growth to rebound next year and, likewise, a pick-up in consumer demand as economies recover and jobs come back,” Mr. Yun said. “But we don’t anticipate a sharp rise in inflation.”

Mr. Yun noted the IMF forecasts negative growth in GDP for advanced and emerging markets for 2020, but a return to growth in 2021.

Ian Riach, CFA, Senior Vice President, Portfolio Manager, Franklin Templeton Investment Solutions, CIO of Fiduciary Trust Canada


Franklin Templeton forecasts lower annualized returns as equity valuations are at historically high levels while bond yields are close to all-time lows.

Ian Riach, a senior vice-president and portfolio manager of Franklin Templeton Investment Solutions in Toronto, said that in the current climate, the firm prefers stocks over bonds.

“We’re not abandoning bonds and believe they still play a vital role in portfolios. We just prefer to be less exposed to bonds and favour equities right now,” he said.

While all said the road ahead is volatile, Mr. Poloz pointed out that Canada entered the pandemic with a strong economy, an unemployment rate that was at a 40-year low and inflation right on target.

“We are in a healthy situation here,” he said. “We are working our way through it as well or better than others.”

Advertising feature produced by Globe Content Studio. The Globe’s editorial department was not involved.

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