Bank of Canada Governor Stephen Poloz has just sat Canadians down and given us a national the-dog-has-died talk. The country lost some things in the Great Recession that ain't never coming back.
Mr. Poloz gently but bluntly laid out the facts in his opening remarks prepared for the quarterly Monetary Policy Report press conference on Wednesday. (The press conference was actually cancelled due to the shootings that took place on Parliament Hill, literally a stone's throw from where the event was to take place, but the central bank released the prepared statement anyway.) He said the bank has been sifting through the fine details of Canada's non-energy exports, all 2,000-plus product categories of them, to better understand why these exports have failed to bounce back in line with growth in foreign demand. What it uncovered was ugly for a large number of industries.
"We have found that the value of exports from about a quarter of them has fallen by more than 75 per cent since the year 2000," he said. "By correlating these findings with media reports, we could see that many were affected by plant closures or other restructurings. In other words, capacity in these subsectors has simply disappeared."
For most keen observers, this shouldn't come as a huge surprise. We knew that manufacturing jobs had been in decline long before the Great Recession arrived, and the downturn only hastened the trend. We knew that in some industries, most notably the automotive sector, Canada had ceded market share to other upstart exporters.
But in our hearts, we may have held out hope that when the U.S. recovery took hold, lifting Canada along with it, dormant industries would magically spring back to life, and a happy wave of rehiring would ensue. Mr. Poloz is disabusing us of that particular little fairy tale.
"We know that when companies restructure or close their doors, the associated job losses are usually permanent," he said. "The restructuring or closure of firms reduces potential output."
In a regular, garden-variety recession, this isn't the case. Firms might reduce staff and scale back output, but the production capacity is still there, it's just not being used. But in deep recessions, such as the one in 2008-09, companies go bust. For a big chunk of Canada's manufacturing export base, there is no longer a bunch of stuff out there that's just sitting waiting for someone to turn the lights back on. The plants are gone.
This is why business investment is stubbornly stagnant. This is why the labour market has sputtered. This is why the Bank of Canada, and others, believe the economy's potential for growth is less than it used to be. Permanent structural damage has been done. It can't be rebuilt, it needs to be replaced – and that's a harder, longer, less certain task. It's why the Bank of Canada is so adamant about the importance of getting businesses back investing in new capacity – that's how we replace what we've lost.
Of course, the Bank of Canada did discuss much of this in the Monetary Policy Report itself. But it's notable that the implications were only made clear in Mr. Poloz's pointed press-conference statement. This has become a vital avenue for the Governor to communicate the bank's thinking to the public – part of a pretty rapid and radical shift in the bank's communications.
Until recently, opening remarks for MPR press conferences were word-for-word regurgitations of the bank's interest-rate-setting statements released at the same time as the MPR. That all changed in July, when Mr. Poloz used his opening statement to provide a detailed explanation of how the bank was interpreting inflation risks. He has now followed this up with October's frank statement.
At the same time, Mr. Poloz has decided to remove the bank's specific reference to its "bias" – i.e. its expectation of the likely direction of its next interest-rate change – from its long-time home in the rate-policy statement. This was something he indicated he was inclined to do in a discussion paper published two weeks ago, on the grounds that the markets obsess too much over minute changes in the bank's "guidance" language, and not enough on the details of the underlying uncertainties the bank is weighing. Essentially, his approach is "stop counting my words, start listening to what I'm saying."
For people (including me) who have gone through years and multiple Bank of Canada governors playing "find the hidden meaning" in cryptic central-bank speak, this may take some getting used to. But Mr. Poloz is a pretty folksy guy, at least as far as central bank bosses go. Expect him to continue to pull us aside as a nation once in a while for these friendly and plain-spoken chats, even if the message is sometimes hard to hear.