Kevin Lynch is vice-chair of Bank of Montreal and former clerk of the Privy Council. Tiff Macklem is dean at the Rotman School of Management, University of Toronto, and former senior deputy governor of the Bank of Canada.
With stock markets plunging, the Canadian dollar way down, oil prices in the tank and companies reporting weak business investment and hiring intentions, a whiff of desperation is in the air. Pressure to accelerate the federal budget timing is mounting, demands to go big on shovel-ready infrastructure investment are growing and the Bank of Canada is holding out negative interest rates as a contingency.
But this is not a replay of the economic crisis of 2008.
The commodity-price rout is forcing tough adjustments on our economy, particularly in Alberta, that will play out for years, not quarters. The United States, our main trading partner, is growing solidly again. The Canadian financial system is functioning well, long-term interest rates are near historic lows and corporate spreads are relatively narrow. Plus, with near-zero policy interest rates, an already very weak currency and a yield curve that is about as low as it can go, conventional monetary policy has very little room to manoeuvre, and unconventional monetary policy is unlikely to be very effective.
Canada's growth problems have been accumulating for years, masked by the commodity supercycle. Economic growth is in a rut, with low productivity, weak innovation, an aging population, declining terms of trade and limited access to high-growth markets. These problems require time, real change, new partnerships and, above all, leadership.
Canada needs new markets for our products and new products for our markets. We need more productive companies and more skilled workers. We need modern, smart infrastructure to get Canadian products overseas and help Canadian workers and firms be more productive. We need to build growth based on a diversified economy.
All this points to a longer-term growth plan for Canada, one that employs our fiscal capacity wisely, strengthens foreign investor confidence in the management of our economy and tackles structural impediments to growth. A growth plan would provide a longer-term road map for business, investors and provinces as to how, working better together, we can revitalize Canadian growth for the long haul. Many of the core elements are already in the new government's policy platform, although some reassembly and clear long-term milestones are in order.
The plan should encompass four pillars: infrastructure, innovation, trade and talent.
Fiscal policy has room to support a growth plan, particularly with today's abnormally low interest rates. With realistic growth assumptions, deficits could be around $20-billion over several years and still maintain a stable to declining debt-to-GDP ratio. In 2008, massive and temporary fiscal stimulus was needed to mitigate a sharp collapse in demand; today's situation is different. Rather than a sharp collapse, we are facing a protracted adjustment that will require ongoing stimulus to support demand while rebuilding our growth capacity for years.
Infrastructure spending is a case in point. Shovel-ready infrastructure – which provides short-term stimulus – is not the same as strategic infrastructure that enhances long-term productivity and competitiveness. While some of the former is warranted, the focus should be on how we can utilize strategic infrastructure investments to enable the economy of the future and catalyze private sector co-investment.
Innovation is crucial to rebuilding Canadian productivity, dynamism and growth in all sectors, but we will not be an innovation nation on our present course. In the absence of an innovation strategy, we have activity, but without focus, alignment or critical mass. Governments should not pick winners, but a strategy that supports emerging winners could be instrumental in helping our most promising growth companies acquire new customers, develop new global partners and accelerate scaling.
This should be complemented with a trade strategy that moves beyond signing trade agreements to the clarity and engagement of a comprehensive trade policy and development strategy. And, in the disruptive world of the fourth industrial revolution (much discussed at Davos this year), a talent strategy that focuses on a skilled, adaptable, diverse and entrepreneurial work force is essential for economies being transformed by technological change.
In the volatile economic environment of 2016, a clear and credible growth plan for Canada would go a long way to resetting expectations and strengthening confidence.