Scotiabank Chief Economist Jean-Francois Perrault talks to Means & Ways about which policies are needed to attract investment, why policymakers will need to get out of their comfort zone to deal with Trump and why the government will fail to meet its new immigration targets.

“There are going to be some really difficult questions for the government to come to terms with—whether it’s the Liberals or the Conservatives—that are going to be disruptive, and that will require some hard thinking. We’re going to be thrown out of our comfort zone, there is no question about it.”

SCOTIABANK CHIEF ECONOMIST
JEAN-FRANCOIS PERRAULT

M&W: What story about Canada’s economy are you telling clients?

JFP: There are two dimensions. One, we are in a world where in principle there’s a lot more clarity. Central banks have been cutting rates. Inflation is under reasonable control. In Canada, we've hit the peak in interest rates and we're in an easing cycle. And we are at the early stages of what is hopefully an expansionary cycle. In principle we have a clear outlook. People are hurting and the economy is weak but we are optimistic that we are on our way out of that as rates come down. But that assumes there is no disruption coming from south of the border and of course there will be a disruption coming. So, there’s a tremendous cloud placed over this clarity that comes from being at this point in the easing cycle in Canada and the U.S. And unfortunately this uncertainty is probably not going to get resolved soon.

M&W: What should policy makers do to support the recovery?

JFP: Well, one thing they can do is not get in the way of the recovery. Things like not repeating some of the mistakes that I think policymakers made in the early years of the rate tightening cycle. So, not undertaking expansionary fiscal policy at the federal level or provincial level. That is counterproductive. That would be counterproductive to having rates continue to go down. The other of course is the investment climate and our historically disappointing investment performance. Are there things that governments can do to turbocharge that? So, I would suspect that over the next couple of years, if the Conservatives come to power and we see them relax rules and regulations around resources, that we’ll get a very significant increase in investment in that space.

M&W: What impact will the new immigration measures have on growth?

JFP: Immigration is a real public policy challenge. You have the federal government's announcements in the last few weeks to curtail population growth, which I don't think is realistic at all. We have to assume that a very significant proportion of the people are somehow engaged in the labor market. There's a risk that's pretty disruptive. It's a pretty strong reversal of a policy. If you're going from 3.5% population growth this year to minus something next year, you know you're probably taking a percentage point or two percentage points off your GDP forecast. So essentially, potentially flat or negative growth, it all suggests that we’re not likely to see the population reduction that they are indicating. We're thinking population growth of probably just under 1%, which is still a very significant slowdown from the pace that we're currently on.

M&W: How fast should Canada’s population be growing?

JFP: The only way to think about it is that if your objective is to raise the standard of living, if your objective is to raise productivity—which is critical to raising living standards—then you need to make sure that investment is rising as your labor force grows, and ideally more rapidly, which of course has not been the case in Canada. The right way to think about it is how much more should I be trying to raise investment so that we can bring more people into this country.

M&W: Why aren’t companies investing in Canada?

JFP: This is kind of a public policy choice. We are on the path to decarbonization. We've been on that path for a while. That, of course, means less investment in the oil gas industry than otherwise would be the case. This has been a global issue, not just a Canadian issue. Now in Canada, historically, that sector has created a ton of investment, and it's been very productive. So by curtailing growth in that sector, you are, in fact, harming in some sense your investment outlook with consequences for productivity. Likewise in the extraction sector. It is extremely lengthy to get mines built in Canada. It’s multiple times what it takes in a lot of other countries, so naturally that acts as a big deterrent to investors in that space. I suspect that's going to change with the new government and I think that would lead to meaningful increases in investment in Canada.

“People are hurting and the economy is weak but we are optimistic that we are on our way out of that as rates come down. But that assumes there is no disruption coming from south of the border and of course there will be a disruption coming.”

— SCOTIABANK CHIEF ECONOMIST JEAN-FRANCOIS PERRAULT

M&W: How should people think about Canada's weakening dollar?

JFP: It's not a uniquely Canadian story. It's very much a U.S. dollar strength story and we're not unique in that by any stretch of the imagination. But, on the other hand, we know that Canadian productivity has been falling and American productivity is rising rapidly. So we've become less and less competitive. And an economy that's less and less competitive should be seeing a weaker exchange rate. So there is unquestionably some downward pressure on the Canadian dollar resulting from this very fundamental productivity issue.

M&W: Are you worried about the amount of capital Canadian firms are investing abroad?

JFP: Fundamentally, a company's got to be strong enough to be able to expand overseas and be competitive overseas. So for me, I see businesses that expand overseas as a sign of those businesses being successful. Maybe pretty frustrated at the same time about investing in Canada, but being successful nevertheless. The reality is that Canada is still a reasonably small market compared to our big trading partners. So there is always going to be much, much, much more opportunity in Europe, in the U.S. and China. My perspective is that if companies are looking to expand overseas, it’s because they are robust enough to go on and grow even more. So I'm not too fussed about that. The bigger question is why can’t we attract foreigners to invest here.

M&W: Are you supportive of subsidies being offered to attract foreign investment into Canada?

JFP: I'm not supportive of the way they have thought through the subsidies. You're picking winners, obviously, and that's part of industrial strategy, I get that. But to me, the big question is, if you have to spend billions and billions and billions of dollars for capital to come into your country, then it raises the necessary question of, is that the best use of those funds. It's not obvious to me. There are more homegrown and more innovative things that we could do for $50 billion.

M&W: How should Canadian policy makers think about the return of Donald Trump to the presidency?

JFP: If the Americans get significant tax reform, particularly on the corporate side, there’s got to be some attention paid to that here. It’s hard for us to afford a further deterioration in our competitive environment relative to the Americans. The other thing will be on the deregulation side. If you look at bank stocks in the U.S., it’s pretty clear that there's an expectation there's going to be a significant rollback of a lot of the regulatory changes that have been put in place since the financial crisis. Now that may or may not be a good thing, but that's going to be a significant issue for policymakers here. If the Americans go down that path and make it much easier, for instance, for banks in the U.S. to finance things and make riskier investments, do we sit by?

There are other things. How do you think about, in the context of the trade negotiations, which sectors are we going to want to protect? Americans are going to want something. What will that be? I know they're thinking about that. There are going to be some really difficult questions for the government to come to terms with—whether it’s the Liberals or the Conservatives—that are going to be disruptive, and that will require some hard thinking. We’re going to be thrown out of our comfort zone, there is no question about it.