Produced by Serge Dupont, David Dodge and Claire Kennedy
This episode was recorded on June 12, 2023, as part of our bi-annual Economic Outlook webinar. Moderated by Claire Kennedy, Lead Director of the Bank of Canada, and current Senior Advisor of Clients and Industries here at Bennett Jones, she is joined by special guests David Dodge, former Governor of the Bank of Canada and current Senior Advisor at Bennett Jones, and Serge Dupont, former Executive Director in the International Monetary Fund and current Senior Advisor at Bennett Jones. Our two special guests will offer a comprehensive look at recent developments, short-term prospects and risks to assist business planning, and describes some of the context for the longer-term and key tasks ahead for Canadian governments and businesses.
Transcript
Serge Dupont: [00:00:00] Businesses have to venture in this fragmented world with eyes wide open and with peripheral vision. But there is opportunity for businesses with a long-term vision and a capacity to take on risk. And there are in support, still underutilized trade agreements as well as government resources and aids.
One has to play offense, and that is a long game.
Enzo Barichello: Welcome to this special episode of the Bennett Jones Business Law Talks podcast. A podcast that sits at the intersection of law and policy, and where we examine today's most complex issues to help guide companies [00:01:00] bloom business in Canada. This episode was recorded on June 12th, 2023 as part of our biannual economic outlook webinar.
The webinar was moderated by Claire Kennedy and featured David Dodge. In Sege Dupont, both senior advisors of Bennett Jones and our government affairs and Public Policy Group, this episode offers a comprehensive look at recent developments, short-term prospects and risks to assist business planning. We also discussed some of the context for the longer term.
And key tasks ahead for Canadian governments and businesses. I'm Enzo Barichello, Senior Corporate Partner and Co-head of the Government Affairs and Public Policy Practice at Bennett Jones. Members of our public policy group have been invaluable for their leadership in shaping public policy in Canada and in developing business responses to those policies.
Let's tune in to the conversation.
Claire Kennedy: Welcome to the Bennett Jones June, 2023 Economic Outlook webinar. We are [00:02:00] simultaneously releasing the Outlook document, which you can find online and download. The report is rich in analysis and insights into the global and domestic economies. One may wonder why a law firm produces twice yearly an economic outlook.
Indeed, we are probably unique in doing so. At Bennett Jones, we work with clients on their most complex legal matters to plan, to manage risks, to make decisions. Our clients need expert legal advice, but they also need context that is reasonable planning parameters for the short term, an appreciation of structural trends, global and domestic, that define risks and business opportunities, and a narrative that ties all this together to make sense of complex systems.
Twice a year. The economic outlook aims to provide this context and inform discussions with our clients. We also view the economic outlook as a public good as a national firm. Most recently with an office now in Montreal, a. We wish to contribute to the dialogue on [00:03:00] public policy and to encourage collaboration between the public and private sectors.
To make this contribution, we have assembled a stellar team in our governmental affairs and public policy group economists, public policy experts, and political figures. Who have served in the highest public offices in Canada and in the provinces. Today you will hear from two of the five co-authors of the Outlook, David Dodge, who served as Deputy Minister of Finance and as governor of the Bank of Canada, among many other roles, and Serge Dupont, who was Deputy Minister and Deputy Clerk of the Privy Council, and also former executive director at the IMF.
David and Serge were joined in writing the Outlook by three of our public policy group colleagues. Richard Dion, Jonathan Fried and Lori Sterling. The economic story of the last three years around the world has been one of response to shocks, and thus one of adaptation and resilience. This reality has struck very close to home in recent weeks with [00:04:00] devastating forest fires from Alberta to Nova Scotia.
These are moments when governments, businesses and communities have to come together and they do. Our thoughts continue to be with those who must rebuild homes and businesses. However, there is also a longer term collective enterprise that is necessary for us to secure our wellbeing. It requires the same determination and the same collaboration.
As our chairman and CEO Hugh McKinnon has observed, it's a time for hard decisions. Hard decisions require a good understanding of developments, prospects, and trends, and there is no better team to address this context for Canadian business than David and Serge.
David, let me invite you to introduce our economic outlook,
David Dodge: This document covers a very wide range of issues facing business, governments, and households as we look to navigate the [00:05:00] choppy economic seas of the last years of the first quarter of the 21st century. Very different world of the second quarter of this century.
We cannot recover, cover all the issues that we cover in our outlook in this brief presentation. But I'm gonna start by focusing on the short term issues related to stabilizing inflation, namely reducing excess demand with tighter monetary policy. Focus on interest rates. Growth in labor markets will then follow with the discussion of the changing structure of the economy as we collectively adapt to and seize the opportunities resulting from technological climate and demographic change in increasingly fragmented world.
But before turning to the short term outlook, I, I want to set this outlook in a longer term context. One of the immediate policy issue that governments and central banks must cope with [00:06:00] in the next two and a half years is getting inflation under control, without killing growth. It's important to realize, For the 30 years prior to COVID, the key issue for monetary fiscal policy was just the opposite, how generate enough demand to up excess savings.
The economic structure of the world we’re all used to before COVID was one in which investment fell short of savings. So the problem I and my other central bank colleagues had to deal with early this century was keeping inflation to target. In this early 21st century world trade kept downward pressure on domestic prices and global supply lines developed through a lot of firms to get down the cost curve through a maximum scale of production.
This global economy with the general margin of excess supply hinder an end in the spring of 2020 when supply crashed due to COVID and workers [00:07:00] couldn't get to work. But before I turn to assessment of how this COVID cycle is playing out, I want emphasize that once we emerge from this cycle in 2025, Canada and the world will not be returning to the pre COVID years of generalized excess savings.
Demographic change will tend to reduce net aggregate saving. At the same time as adjustment to climate and technological change will require increased public and private investment with stronger investments, slightly exceeding plan saving. The national real rate of interest should be positive and inflationary pressures much more present.
I commend you to Deputy Paul Beaudry’s June eight speech on the prospect. Of higher rates in the decade ahead. But before we get to this longer term, the world after 2025, Canada and the global economy must traverse the choppy seas of adjustment to the impact of the COVID supply [00:08:00] shock and its aftermath high inflation.
Tight labor markets faced with collapse of incomes. In March, 2020, governments moved to fill the income gap with government transfers. Central banks printed money to facilitate expansion of credit, and this quick action was remarkably successful, and recovery began right in the fall of 2020. But the expansive monetary and fiscal policy continued.
In 2021, creating a massive increase in demand, which COVID economies just could not fulfill as prices began to rise first for goods in 21, followed by services in 2022. And you can see that from the green line in this chart. The excess demand for goods and services spilled over into the labor market, and wages began to rise along with prices that you can see from the light green line on this chart.
Over the whole period since COVID [00:09:00] struck in 2020, the average hourly wage in Canada has more or less kept pace with price increases. So the average real wages are about the same today as they were in 2019. Well, the supply of labor, the black line on the chart also recovered quickly by early 21, and the labor force was its pre COVID rate of growth, labor demand, that's the green line increased much more rapidly.
Creating very tight labor markets by 22, as can be seen on the chart. The demand and supply for labor lines converged in 2022, and much of the reason for the sharp increase in demand for labor was of course the increased demand for growth and services principally coming from the household sector. But part of the reason why the demand for workers in the business sector grew so rapidly was that output per worker [00:10:00] fail and new workers had to be absorbed into the labor force.
This decline in productivity in both Canada and the US as can be seen by the solid bottom lines on the chart was it to all the fact. But the amount of capital equipment available per worker couldn't be increased fast enough. Time was required for increased investment. This recent experience with declining worker productivity is an important signal that employers cannot rely.
Alone on new hiring to meet their output goals. Additional investment in capital equipment and systems is required. I'll turn in a moment to the issue of future supply of labor, but simply note here that our recent experience in North America illustrates the importance of equipping workers with appropriate and adequate capital equipment.
Now as prices began to rise quickly in 2021, it [00:11:00] became clear that action was required to constrain demand growth, to bring it more into line with supply capabilities. Central banks here and around the world, very relatedly began to raise policy rates in 22 and have continued to do so as can be seen from the table on the screen.
But central banks have been acting largely on their own. To constrain demand spending by federal governments in both Canada and the United States have continued strong in 22 and 23 as both governments began to plan to make or to subsidize investment in the green economy. Strong plan. Government spending over the next couple of years will continue to provide mild support for demand, and it will continue to be up to central banks.
To manage the evolution of inflation. So the question is, how's inflation likely to evolve within to the [00:12:00] balanced global commodity markets goods inflation? That's the black line on the chart. We're fall dramatically this year. However, services inflation, the light green line will fall much more slowly remaining well above 3% through 2024, and this implies it'll be very difficult.
To get total CPI down to 2% by the end of 2025, given the stickiness of inflation, we continue to hold the view that the Fed and the Bank of Canada will have to keep their policy rates higher for longer than many analysts believe will be the case. We see peak rates of 5.5%. In the US 5% of Canada late this year, and then a slow decline through 24 and 25 which will leap policy rates still close to 3% at the end of 2025.
The policy [00:13:00] rate and tenure interest rates on the chart constitute we think a reasonable basis for business planning. What does this outlook for monetary policy imply for growth in both countries? The short answer is that a period of very low growth, but not necessarily a recession, is needed in the second half of 23 and early 24 in order to curb excess demand.
And bringing inflation down as just projected growth. Starting started strong in 23 in both countries. So 23 may turn out to be a little bit stronger, a little bit stronger than the 0.7 and 1.2 showing on the chart. But in all livelihood, 24 would then turn out to be somewhat weaker nevertheless. Both in both countries should be close to potential by 2025, [00:14:00] as is shown on the chart, much more detailed analysis of the likely course of inflation.
Interest rates and fiscal policy is contained in chapter two of our report. And I commend it to you. We've also provided in chapter three of our Outlook document a careful analysis of the outlook for labor supply, a topic of great interest to employers, and an issue to which I will now very briefly turn.
The excess aggregate demand for labor in Canada experience in 22 should dissipate in the short run. As the economy cools, the labor force participation rate of older workers increases a bit, and the number of immigrants remains high. The chart on the screen indicates that the labor force will grow roughly by about one a quarter percent annually.
In our base scenario. That's the green line[00:15:00] with high immigration and still grow by a bit over 1% even in our alternative scenario, lower immigration. In both cases though, growth and labor supply would be higher. Then the growth that we experienced in the last decade. On the assumption that labor demands roughly equivalent to supply under these scenarios and labor productivity increases at an annual rate of a bit less than 1%.
Canadian potential growth could be slightly more than 2% on average. Over the coming decade to achieve this outcome, this outcome of a balanced labor market as is shown on the screen, higher productivity will be required, and that will require sustained investment in both physical and human capital. Now we project that the number of workers should be adequate over the medium term.
We are concerned [00:16:00] that the skills of the workforce may not be sufficient to raise productivity, growth, and to help meet the structural challenges as the energy transition and digitalization occurs. We want to emphasize that while immigration is extremely important, excessive reliance on immigration would in fact lead to a low productivity, low growth economy.
I now turn to Serge to address the investment issues and challenges that lie ahead.
Serge Dupont: Thank you, David. The longer term perspective for our economy has to be rooted in an understanding of the world as it is being shaped today. Our colleague, Jonathan Fried, authored the chapter in our report. To review this context, let us start with a simple indicator trade as a proportion of GDP for any country.
That indicator is quite simply exports plus imports of goods and [00:17:00] services divided by GDP, what we observe globally. Is that this indicator peaked just before the 2008 global financial crisis. Since then, there have been year to year variations. For example, a sharp drop in 2020 because of COVID, and then in 2021, a strong recovery, but no clear trend up or down for Canada.
Incidentally, this indicator in 2022 is just about where it was in 2007, 67%. This means that the period of close to 40 years, beginning in 1970, during which trade grew faster than output has come to an end, or at least a pause trade is no longer the same engine of growth for the world and for advanced economies.
As David mentioned earlier, there's no longer the same growth in the inflow of cheap manufactured goods from China that for many years exerted downward pressure on inflation. There's no de-globalization. The gains from trade remain [00:18:00] openness to trade and investments. Specialization in skills are still important to raise productivity, but the world is changing.
This slide shows distribution of projected global GDP growth in 2023. China accounts for 35%, India for 15%. Asia in total, close to 70%. That's not a one year oddity. It's a function of demographics and potential growth in that dynamic part of the world. Again, the world is changing. The world is also becoming more complex and more fragmented.
The war in Ukraine was a shock for commodity markets. A reminder of the value of energy security and for many countries, food security. The strategic conflict between the US and China is causing national security and economic security increasingly to be advanced together. This was perhaps always the case in the US or in China, but it is now truly universal.
The [00:19:00] US and the G7 insist that we are not decoupling from China, only de-risking. But implications for industries like critical minerals, semiconductors, EV vehicles, or AI are profound. The pricing of carbon border carbon adjustment has now advanced in the EU, and the revival of industrial policies such as the US IRA all have defensible goals, but they also have protectionist defects or even motors.
The data economy, its rules and standards is another field for economic and strategic advantage. The remarkably rapid, indeed scary development of AI is raising the stakes even higher. The WTO is in retreat, and there's a multiplication of bilateral or fewer lateral deals, including sectoral deals. Supply bottlenecks experienced during the recovery from COVID are largely resolved, but supply chains remain vulnerable to a range of risks.
Finally, the ESG [00:20:00] performance of firms internationally is under watched by governments and markets. Businesses have to venture in this fragmented world with eyes wide open and with peripheral vision. But there is opportunity for businesses with a long-term vision and a capacity to take on risk. And there are in support, still underutilized trade agreements as well as government resources and aids.
One has to play offense, and that is a long game. We may be criticized at Bennett Jones for repeating this often, but we'll do it again. Canada is under investing. This charge shows public and private non-residential investment as a proportion of GDP. The gap compared with the US and the average of other OECD economies is two to three percentage points, or 60 to 90 billion of investment per year.
The drop in Canada since 2014 and the recent pickup are explained in part by developments in the oil and gas industry. This is [00:21:00] confirmed when one looks at investment in structures. It's non-residential construction and structures where can in fact invest more than other economies because of our geography and resource base.
However, there's no reasonable explanation for large and widening gap in investments in machinery and equipment. Even less so in a data driven economy for a gap in investment in intellectual property products like software or r and d researchers for the C.D. Howe Institute Looking at Business Investment Per Worker observed the same trends and concluded the average member of Canada's labor force began 2022 with less capital to work with than she or he had in 2015.
Results for the last quarters and the productivity performances just presented by David show that there are yet no signs that we're turning the corner. This is a serious red flag for our capacity to [00:22:00] raise income per capita over the medium to long term. In the last federal budget, the government of Canada doubled down on an industrial policy to accelerate investment in decarbonization and to the extent possible match incentives in the US IRA has depicted in the chart and in the budget that's lifted from the budget.
The construct from regulation to tax credits to investment vehicles like the Canada Infrastructure Bank and the new Canada Growth Fund and to subsidies is ambitious. And it is complex. Firms will be forgiving for not knowing where to start or where to end. But clearly there's an effort to support private investment.
Analysts from TD Bank have estimated that the fiscal commitment over the next 10 years proportionately exceeds by a large margin. What is in the IRA one hopes it'll help move the needle on at least some types of investment. However, there's no certainty. What matters now is execution. [00:23:00] Many of the technologies like hydrogen or CCUS, while proven, have not been deployed at scale.
Others like direct capture are in earlier stages of the innovation process. There's market risk, for example, related to demand, price, infrastructure, and therefore the stream of revenue. Think hydrogen in that regard. There's policy risk, for example, readily to carbon pricing, an emissions cap for oil and gas.
The Clean Fuel standard or a clean electricity regulation, many moving parts, and much federal provincial interaction. Then there's the uncertainty in getting the permits to build new facilities on a timeline. Managing these risks and executing projects requires close public and private sector collaboration.
Moreover, as we advance on a path we have to maximize value for Canada, including the value we earn from our oil and gas resources through the transition in a world that still values and indeed that values and [00:24:00] more energy security and the value we earn from our innovation, from the IP that we can capture and commercialize as we invest public and private monies in resources and technologies like hydrogen, CCUS, SMRs or other.
We do not pronounce in our report on whether this industrial policy will achieve its goals. What we say is that it's not sufficient. We have to step up, investment to adapt to other structural forces, in particular technology and digitalization that are disrupting ways of doing business across the economy.
For this, we cannot simply multiply tax credits and subsidies. The tax code is already complicated enough. Discrete measures create distortion. Some wanted, of course, that's the point, but some unwanted, and then there's a loss of revenue for governments that still have to pay for public services. Rather, we need to get back to basics and implement a framework that will allow the market to [00:25:00] deliver the incentives for investment in innovation.
The greatest incentive for investment is the threat posed by a competitor. Success in a competitive home market is also the best foundation for global success. This too has been repeated. Often there's not enough competition in Canada. For the last decades, liberalization of international trade and investment was an important lever to stimulate competition.
That is still the case, but as discussed, we're unlikely to get the same expansion of global business and the same contribution to competition. Over the next decades.
The quotes on the chart, of course, are from the Competition Bureau in its submission to a review of the competition act that is now ongoing, the first, since 2007, 2008. Basically what the bureau is saying is at first we [00:26:00] have to get our act up to modern standards, including to deal with digitalization in big tech.
And we have to administer it more forcefully, including by partnering with other global authorities. But second, we have to place competition higher in our ranking of objectives as we develop other policies to create the right framework and incentives for investment and innovation. There are many policies deserving of review.
For example, our privacy and data management framework are not up to modern standards. A bill was tabled in the last parliament. It died with the election. A new bill was tabled in June last year, and only in late in April, was referred to a house committee study. The bill and committee has not commenced.
Our modern economy is largely a data economy. Users expect a stronger protection of their privacy investment requires clear rules. This should be a priority. Internal trade should be low hanging fruit. Yet [00:27:00] we make the enterprise tedious. The IMF in 2019 estimated that the barriers put up by provinces cost our economy 4% of GDP.
Now, let us say this is under overestimated by overzealous PhDs in economics who cannot possibly understand Canada and let us cut the figure in half to 2%. To put this in perspective, if we generated this added output and as an economy invested the equivalent amount, we would be solving two thirds roughly of our investment gap.
Provinces are in the driver's seat here. This does not require more money from Ottawa, only a willingness to confront entrenched interest. Our point is that to stimulate investment, we need to do more than paying out tax credits and subsidies. Now, to be clear, this is harder for governments to do. It can be unpleasant.
Also, for some businesses, there can be winners and losers. In fact, it's why [00:28:00] many look for exit doors when the words policy reform are pronounced. But we cannot afford complacency and there has to be a stronger competitive pressure, clear rules, and the right incentives to invest and to innovate. In planning for the medium term businesses have to defined their path in an economy that globally is being reshaped by demographic, climate and technological change.
They have to invest a greater share of their retained earnings and thus reduce cash returns to shareholders today to build a stronger and sustainable stream of future earnings. Tomorrow, they have to equip workers with more and better skills in capital, and they need from governments, federal and provincial, the right policy and regulatory frameworks.
And for this, they need to engage in the policy discussion.
Claire Kennedy: Great. Thank you Serge. Let's get underway with our conversation here. I'm going to take the [00:29:00] first question to you, David. The Bank of Canada has said more than once that it's committed to getting inflation back to target. That is to a midpoint. In a range of one to 3%, and so 2%. But what happens if demand is resilient and inflation stays closer to 3%, rather than getting all the way down to 2%?
There's some you know, some voices or calls in some quarters to just live with 3% inflation. What, what do you say to that?
David Dodge: Getting inflation down once it's moved up is always very difficult. We've spent 15 years from 1970 to 1985 dealing with that. So I think the, the, the final answer is that, that having got it down, we need to keep it down and it may just require a good time to bring it into balance, but having established a view.
That people can rely on relatively stable prices going forward.[00:30:00] That that is extraordinarily important. We don't want to return to the sort of conflict in our society that comes from a period of high inflation. And so, in my view, we should continue to drive to get inflation well into that range of one to 3%, which we have managed to do very successfully between 1990 and 2020.
Claire Kennedy: And of course, Canada was an early adopter of inflation targeting. And I think what you're pointing out is that anchoring effect around 2% has, has significant value. And so there would be cost to moving economic and social. Yeah. Cost of moving away from that anchor.
Serge, sounds like you're nodding in agreement. Let me come to you on, on in on industrial policy. Industrial policy seems to have come roaring back maybe like inflation after a period where it was absent in developed [00:31:00] economies. And governments seem to be all in, in a sense, on industrial strategy. And of course, budget 2023 outlined an industrial strategy focused on the clean economy. And you pointed out that there's many parts. There's a pyramid that is that that is set out on, on one of the slides. But just let me put it, you know, directly to you. I know you're a cautious person and a prudent civil servant. Is this going to work like yes or no?
Serge Dupont: So you won't be surprised to, you know, to hear, I won't say yes or no. The, the one thing I will say is that, you know, there, there's, there's one view of the world that we shouldn't do any of this. That, you know, we should just establish the right kind of conditions.
Sound regulatory frameworks, low taxes and everything should take care of themselves. That may be fine, but that would be an experiment where we would be the only ones on the planet doing that, frankly. I think most economies try to see where they have some. You know, some collective enterprises that they can actually succeed at and see how they invest together public and private [00:32:00] sectors to move them forward.
It's tricky. It's hard, but I think everybody's trying to do it in one fashion or another. I would say here that on the fiscal side, at least in terms of the, you know, the, the kind of investments that, the public investments that may be deployed, I think the government has pretty well now put all the instruments on the table.
And, and, you know, it's, it's now a matter of. Getting to the execution, as I indicated in, in, in my remarks there's still some regulatory items to be tied down that are necessary to provide some clarity for businesses. And I, I did talk about the issue of the permitting as well, which is huge, and I think on the private sector side there is.
Clearly strong investor interest. And we see it at, at Bennett Jones when our dealings with clients, and obviously they're kind of, you know, looking and engaging all of this. Some of course have already invested considerable amounts in different parts of the central price. I think there's still some hesitation, however, coming from the fact that.
You're not just, it's not just projects. You're changing systems. [00:33:00] You know, if you're going to move to a hydrogen, hydrogen kind of based kind of, you know, part of the economy, or you're going to develop CCUS at scale, or you're going to go into SMRs, it, you know, it, it requires a full, again, infrastructure supply chain.
Everything else has to move together. And you know, there's a bit of a, you know, you know, you know, after you, kind of perhaps, you know what, I'm not quite sure. I want to be the first to, to commit here. This is real risk. My sense is that, you know, again, the, the cards are pretty well on the table. There probably still needs to be some, you know, some collaboration with public and private sectors.
But if momentum starts to actually build, I think still it can actually happen pretty fast. Will that ultimately be the, you know, the perfect course, the optimal course? Probably not. It's going to be choppy. There's going to be some, there'll be going to be some mistakes made along the way. Some investments are not gonna pan out at all.
But I think it's, you know, I think there should be hope that within the next, you know, two, three years, it's that we [00:34:00] actually see some acceleration of the response, particularly in terms of, you know, this transition to a cleaner economy.
Claire Kennedy: Right. Thanks Serge. I'm going to stick with this, you know, in this area about investment levels in Canada. And you've given some explanation there in the context of the you know, the, the green economy and some Challenges and uncertainties that that businesses face. But you know, that's true. Outside Canada as well as it as it is inside, there are obviously domestic factors in every country that are, are unique to that, to that country.
But we've got a question here from an audience member about, what are the leading explanations for the, you know, relatively low? And I would say that's perhaps a generous characterization, relatively low non-residential investment levels in Canada. Can you kind of paint a, a broader brush and then I'd invite you to kind of come back and elaborate or just emphasize what that is actually costing us as a Canadian. So maybe I'll go to David on that question, and then I'd like to [00:35:00] hear Serge’s thoughts as well.
David Dodge: You saw Serge’s chart that if we go back to early years of, of the century, that our levels of investment in m and e machine and equipment was relatively low. And has been relatively though this has been a characteristic of, of our economy, which I would say is in the end, the reason why our productivity growth over that long period has lack the productivity growth in, in the United States in, in the, in the same industries that we just have not been willing here to reinvest.
At the same level that the Americans have, have been willing to reinvest so that that is an explanation exposed of what, what it was. The cover question is what, why, [00:36:00] what has been driving? The fact that we have made less investment. And now I want to turn it back to Serge because he opened the issue of competition that has in fact been important factor in driving that investment in the United States.
Serge Dupont: I was hoping David was going to answer the question fully. Because it, it, it is a bit of a mystery. I mean, you know, people have been kinda wrestling with this for four years and, and, and trying to think of it, what would be, you know, the, the, either the policy initiative or, other that would, that would change things around.
But I think you kind of, the reason why competition keeps coming back. And whenever you talk to businesses, even whether you're talking to the telecoms or bank, oh, it's like, it's very competitive. And the way we fight, you know, for the inch of market share. You wouldn't believe, and, and it's probably right, but I think you still have to look at a system [00:37:00] overall that is generating some pretty good profits for corporations and yet with under investment compared with other jurisdictions.
I mean, and so putting those two together, you kind of have to come to a view that there's not as intense competition as in other markets. You know, and then if, if the returns are good, if the shareholders are happy with, you know, the cash coming back to them. Then you know that that can last as long as it can last.
And you may at a point in time reach a, reach a point where, okay, you knew, you now have the foreign competitor in your backyard, or you do start to find that this is no longer sustainable. And then some action is necessary. But I, I, we don't, we don't try to give, you know, the single answer here again, it's been looked at by many folks, why not more investment in R&D from private?
Why not more of an innovation drive. And again, you know, this is, don't want to sound like, you know, the, the, the bureaucrat from Ottawa saying, you know, what businesses are not doing. They, they kind of know how to, you know, how to run their [00:38:00] businesses, but it, it, you just look at the facts and do the international comparisons.
There's a bit of a gap there. We don't necessarily have the right explanation, but we think that competitive competition intensity would be part of it. And it seems that, you know, the competition bureau and the commissioner agree with us.
Claire Kennedy: A question here, and, and it's largely a comment I think from one of audience members who I think would agree largely with what you're saying.
Phillips says that Canada is a perpetual under investor in technology and continues to be a laggard in innovation. You know, despite many government programs to entice such as investment tax credits and shred, and the like. And so his question is, is this problem actually fixable? And he points to, it's in the nature of Canadians to use carrots versus sticks.
And to a certain extent, necessity is the mother of invention, which I think is what you're saying with competition policy. And, and we seem too comfortable, says Phillips. So maybe you could say that a com, the right competition, competition framework would be neither a carrot nor a stick. But it's more [00:39:00] a kind of an environmental consideration that would in incent more competition. But in terms of these kind of targeted government measures, do you think he's right that we favor sort of carrots over, over sticks in Canada and, and should we be you know, revisiting some of those, frankly, if they're not fit for purpose?
Serge Dupont: Yeah, I think that was David, I think that was part of the, the thesis of Peter Nicholson. A few years back, that we need to shift a bit from, you know, trying to you know, to, to buy it, to, to, to incite it in a different way. Claire, let's just, you know, take one example and, you know, again you know, our banks are very competitive in terms of, you know, going after each other for shares in, in the mortgage market and so forth.
But let's take the domain of payments. As an example. And that's how we do our, you know, basically exchanges of, of, of, of payment, of exchanges, of value. When we do our, you know, purchases online or in-store, what do we use? Typically we use a credit card and [00:40:00] that. Works its way through all the economy. And you can kind of think of the payment system now compared to what it may be possible and is possible in other jurisdictions. It's kind of a 1% tax on the retail transactions in the country. As we know. They're basically, you know, there's, you know, less than a handful of credit cards 10 years ago.
There was an advisory committee established to make recommendations how we could improve our payment system, and it basically made a series of recommendations to say how we could transform it for a digital world, take advantage of efficiencies in digitalization and so forth. More than 10 years later, we actually have not implemented yet the recommendations from that committee, which were sound recommendations, and the, the payment system, the new payment system, that's called Real-Time Rail, has been late now for a number of years, and we still don't really know exactly when it's going to come online. And this is kind of holding back innovation and competition. We, with the Center for International [00:41:00] Governance and Innovation. I think some of, some of the participants probably know this.
We've been, we've done a series of workshops now with international and Canadian experts to try to focus a bit on. Banking in the digital world, and what we find is that Canada's falling behind right now. We're not, again, investing in this enterprise to the extent we should as a system. So in Brazil, their digital payment system called Pix was brought in by the central bank.
A transaction cost about 20 basis points. Compare that with, you know, a 100 to 150 basis points that we pay routinely with credit cards. And who's paying that? That's consumers. That's small businesses. And it, it really matters at the end of the day. And we're, what we're saying in this report that's been going to be issued this, this week report jointly again with Siggy is that even if we manage to do now the real-time rail, Say in, you know, in a year and a half or two years, it's finally there.[00:42:00] Okay. We'll be in the 3G world, the world is working in the 5G world. So, you know, we, we do need to again, try to bring policy together with the private investment to you know, to take our economy to where it needs to go.
Claire Kennedy: Yeah, we've talked a lot about sort of pace of change and pace of innovation, and I think there's a, there's a lot of work still to be done in Canada in a number of sectors on the green economy, on, on payments and digitalization more broadly, as you pointed out.
Serge, I want to pivot though let's, let's come back. David you, you referenced Paul bore's speech, deputy Governor Paul Beaudry, who gave a speech last week following the bank's rate announcement. The speech was entitled, Are we entering a new era of higher interest rates? And if I understood your comments on it, I think the answer is essentially yes.
In your view. But can you help us unpack some of those factors? So I'll just sort of throw out, play devil's advocate a little bit. You know, talking about [00:43:00] digitalization and ai, I think there's a view and it makes intuitive sense to me. That artificial in intelligence will be disinflationary. So given this kind of AI juggernaut that appears to be coming at us, why would you say that we are looking at an era of higher interest rates.
So take, take us through some of the factors around your thinking. On that.
David Dodge: You get higher interest rates when demand for investment. Exceeds the supply of savings that are coming forward. So on the savings side we're moving in, we're moving the great bulk of our baby boom population, for example, we're moving them out of the high savings years and they'll be in the super high this savings years.
Very soon as they're in their eighties and nineties and become centenarians. And so we have a [00:44:00] decline in the rate of savings going forward. And this is here, but it's also around the world. Secondly, on the demand side. We face these tremendous challenges that we've been talking about to make new investments now, or now over the next decade in order to carry us into a world of lower carbon by the middle of the century on the one side.
And that means enormous investment in the short run that has to be funded. And as that gets funded either by business borrowing or by governments borrowing to do it then that tends to drive up interest rates. And that also clearly is one where it tends to drive prices. The cost of getting to a zero net [00:45:00] zero world is very real.
And cost in terms of having to make the investment now in order to get the benefits down the line. So now we have to pay for the airport improvement fee before the airport improves, so to speak. And that's the period we're getting into.
Claire Kennedy: So it's for a greater, greater investment.
And that, that sort of pre-stage an era of naturally higher, higher interest rates maybe in the spirit of everything old is new again. We've had a question on that I think relates to the point that was made about kind of stickiness of potential stickiness of inflation and, and higher inflation.
We've got a question from an audience member, and I'm going to go to you, David, as a, as a former Central Bank governor, is it possible to impose price price freezes or price controls to curb inflation? And perhaps you could elaborate a little bit on, on what the cost of doing so [00:46:00] might be.
David Dodge: Well, I spent three years at the anti-inflation board in the mid-seventies. The answer is we don't want to go back there. We don't want to do go there. We want the, allow the market system to work and the market will do it. It may take a little bit of time but it, it does work. And so what we do is we will have higher interest rates.
We will have some downward pressure. On demand coming from that in order to bring the two in, the balance, that is the way to do it, rather than going and looking to impose explicit controls in there. Done that. Don't want to do it again.
Claire Kennedy: Okay, so 60 might be the new 40, but we should not be going back to wage and price control.
So Serge and David, I'm going to put this question to both of you. The, the outlook and, and, and prior outlooks have, you know, very consistently you know, pointed out the need for execution. It's a time for execution. It's not [00:47:00] necessarily a time for just more programs and talking and, and debates and so on and so forth.
It's time to really get down to action. It's a, it's a call to action time. You said that again today, and Hugh McKinnon said something similar in in his forward to the economic outlook when he said it's a time for hard choices. So I'm going to put a hard choice to each of you. If you could execute on one, and this is the hard part, a single priority what would it be?
I'm going to go to Serge's first and then I'm going to circle back to David on this question.
Serge Dupont: I'll answer it and then I won't answer it. I think if it was the in government, I would say, all right. We are not actually going to announce any new spending initiative over the next, you know, period. We will strictly be looking at ways to expand our economic potential through other means, basically through better regulations, through better.
Legislation. And of course in the meantime, we will continue to work with the private sector in trying to execute on [00:48:00] what it is that we've already put forward. But the, I, I guess on the business side, Claire, I just wanted to perhaps the, the way I would put it in terms of, it's not a one thing, but I would say that probably every business around the country or every organization has before it.
Within the next number of years, we'll have one critical, at least one critical strategic choice to make. Do we go left? Do we go right? Do we adopt this technology? Do we go into this market or not? And I think that what Hugh is probably saying, always dangerous to, to try to elaborate on the thought of our CEO.
But is, you know, maybe we need to accelerate some of those decisions somehow. Not put them off. And, and really try to look at, you know, for every organization what is that key strategic decision? How is the world changing? How is it affecting us, and how are we going to [00:49:00] respond? And yes, we're going to have to make bets here.
Now this is not going to be just a matter of seeing the steady stream of predictable income. There's going to be a risk we're going to take. How are we going to mitigate it Reasonably. But there's going to be a risk because the world is changing and what may seem like a steady stream of income right now will not be.
And we need to look at something else. So what is that? What is that item? So I think it's a question to be asked of every decision maker, basically. And you know, it's not one for Canada, I think it's, it's one across organizations.
Claire Kennedy: Okay. A good answer. I'm not sure I got one priority out of that, but well,
Serge Dupont: the priority I said on the governance side was just stop spending. But anyway.
Claire Kennedy: Okay. David, over to you.
David Dodge: It it, similar vein, but it, it's all components of society that face this. We have to give up some nice things now to [00:50:00] make and make an effort in order that we're going to have. A future as we get out towards the end of this quarter century, we're about to be beginning and we have to all be honest with ourselves.
Households have to understand that in the short run they're going to. They're actually going to be able to consume less of their income. They've, they've got to, they've got to prepare themselves, if you will, for these changes that are coming. Governments have to do the same preparation, and just as Serge says, businesses have to engage in that.
This is not fun stuff. This is not business as usual. This is not a return to the pre COVID world. In which we were perhaps all too comfortable in generating actually very low rates of growth. We can't, we, we, if if we trying to go back there, then indeed [00:51:00] we'll be on that very slippery slope going forward.
So the point being is that it's up to all of us, and hence going back, Claire, to your very opening remarks that this is a time. When all, all components of our society, the households, the businesses and the governments have to work together to pave that, that future which would look, we would like. It's not easy.
It's not going to be easy and it's not going to be comfortable. And we have to be willing to engage in a period of some degree of discomfort if we're going to. Have comfort a little later on in this quarter century.
Claire Kennedy: Great. Well, I think that's a, just a fantastic way to, to close out what's been a really, really rich discussion.
Playing the long game is not something we can do from, from a space of too much comfort or complacency. So, It's a time for for [00:52:00] action for investment to close the investment gap, gap in the productivity gap and coming back to where we opened with that is going to require collaboration and effort in both the public and private sectors.
So I want to thank you Serge and David for a really rich conversation today. And of course, thank our audience for contributing with your fantastic questions. Thank you all for joining us today. I do invite you to visit the Bennett Jones website. Where you can review, download, and share the outlook.
Enzo Barichello: Thanks for joining us on this special episode of the Business Law Talks Podcast. Make sure to hit the follow button on whatever platform you're listening from so you get notified whenever we release new episodes. Also don't hesitate to reach out. If you have any questions about the topics covered in this episode, our contact information can be found directly on our website at bennettjones.com.
Thank you and we hope you can join us for our next episode.[00:53:00]
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