CANADA ECONOMICS

NAFTA

Public Services and Procurement Canada. May 16, 2018. Minister Qualtrough to promote Canada–United States trade at the Oregon Consular Corps’ Trade Gala in Oregon

Gatineau, Quebec - Canada and the United States share one of the most mutually beneficial economic relationships in the world. Canada is the number one market for most American states and is among the top three customers for the majority of states. The Government of Canada is committed to strengthening this important relationship and to creating new opportunities for workers and businesses on both sides of the border.

As part of these efforts, this week the Honourable Carla Qualtrough, Minister of Public Services and Procurement, will visit Portland, Oregon, where she will deliver a speech at the Oregon Consular Corps’ Trade Gala. The Minister’s remarks will stress the importance of the North American Free Trade Agreement (NAFTA) as an engine of growth and prosperity for Oregon.

During the trip, Minister Qualtrough will also attend roundtables on uncoated groundwood paper, metals and women in business, and will meet with Oregon Governor Kate Brown, Portland Mayor Ted Wheeler and members of the Oregon business community.

Quotes

“Canada is the top export market for the majority of American states and in the top three markets of 48 states, including Oregon, where we’re second. Canada–Oregon trade partnerships are diverse: from aerospace parts to tree fruit, from machinery to building materials and from semi-conductors to energy products.”

- The Honourable Carla Qualtrough, Minister of Public Services and Procurement

“Canada and the United States have the greatest economic partnership of any two countries in the world. We are energetically at work modernizing and updating NAFTA in a way that upholds and defends the best interests of Canadians. We know a fair deal, a win-win-win deal, is within reach. That is what we are working towards. Canada is absolutely committed to this outcome, and we are working tirelessly to achieve it.”

- The Honourable Chrystia Freeland, Minister of Foreign Affairs

Quick facts

• More than 98,000 jobs in Oregon depend on trade and investment with Canada.
• Oregon exported more than CAN$2.3 billion worth of goods and services to Canada in 2017, an increase of more than 8% over 2016.
• NAFTA is the biggest and most comprehensive economic region in the world, with a regional market of 480 million consumers and a combined gross domestic product of US$21 trillion.
• Canada and the United States share the world’s longest secure border, over which approximately 400,000 people, and goods and services worth CAN$2.5 billion, cross daily.
• Canada and the United States share one of the largest trading relationships in the world. Canada is the largest market for the United States, with US$283 billion worth of goods exported to Canada in 2017, more than China, Japan and the United Kingdom combined.
• Millions of good middle-class jobs on both sides of the border depend on this partnership. In the United States alone, nearly 9 million jobs are linked to Canadian trade and investment.
• Canada and the United States share values and interests on a range of international issues, including human rights, democracy, development, defence, nuclear non proliferation and counterterrorism.

FULL DOCUMENT: https://www.canada.ca/en/public-services-procurement/news/2018/05/minister-qualtrough-to-promote-canadaunited-states-trade-at-the-oregon-consular-corps-trade-gala-in-oregon.html

The Globe and Mail. 16 May 2018. OPINION. The deadline for a NAFTA deal has come and Canada’s position is vulnerable, defenceless, precarious
LAWRENCE MARTIN, Columnist

Prime Minister Justin Trudeau said on Tuesday a deal to modernize the North American free-trade agreement is “very close.”

Don’t try telling that to officials involved in the negotiations. Unless there is a wholesale change of attitude by the Americans over the next few days, they say the negotiations are headed for failure. The Canadian side is very frustrated. It suspects Washington has been purposely running out the clock on negotiations.

Given a failed outcome, it will then be up to the whims of U.S. President Donald Trump whether to scrap the trade agreement entirely or to have negotiations on a new accord continue following the election of a new Congress in November. He will also decide whether to hit Canada with threatened tariffs on steel and aluminum.

In other words, Canada’s position is vulnerable, defenceless, precarious. Choose your adjective and get ready for the fallout.

There’s a deadline of Thursday for negotiators to notify Congress of an agreement. An extension may be possible, but only for a very short period.

The sides have been negotiating since the past summer, but a whole range of issues, as commerce secretary Wilbur Ross said this week, have yet to be resolved. Asked if the Americans have been, to use hockey parlance, “ragging the puck,” a senior Canadian player in the negotiations said, “Very much so.”

Part of the problem is that there is no unified view on the U.S. side, he said, as to what a renegotiated NAFTA looks like. And there is also the problem that Washington isn’t overly concerned about getting a new deal in the first place. It’s not urgent. If they can get all their demands met, then fine. If not, they’re prepared, as Mr. Trump has threatened, to throw the agreement to the winds.

From the U.S. side, the complaint is that Mr. Trudeau’s government is not offering enough concessions to move negotiations forward. “That’s certainly their storyline,” said the Canadian insider. For them, trade deficits are the main issue. “Most of their NAFTA deficit is with Mexico no matter what phony numbers they use and most of that is autos.”

What they have to do, he said, is solve that question. “If they have mostly agreed on that, we can move quickly to deal with other issues. Very quickly.” (Owing to the sensitivity of the NAFTA negotiations, The Globe and Mail allowed the sources quoted here to remain unnamed.)

Mr. Trump talked on the phone on Monday to Mr. Trudeau about the importance of getting a NAFTA deal. He reportedly told the Prime Minister he was ready to do a deal. With the mercurial Mr. Trump one can never tell. But it would centre on autos. If an agreement on auto-sector trade can be completed, a lot of the other boxes can be ticked off.

Jared Kushner, Mr. Trump’s son-in-law, who has taken part in the negotiations, obviously has the President’s ear. Canadians say he gives the impression of wanting a new deal, but only on U.S. terms.

Beyond auto trade, the two sides are apart on rules of origin, a dispute-settlement mechanism, dairy imports, a sunset clause and other issues. Even if all the Canada-U.S. disputes can be resolved over the next few days, there is still the question of Washington working out its differences with Mexico, which is no small matter.

Another source of frustration for Ottawa is that congressional Republicans are not exerting much pressure on the White House to resolve the NAFTA issues. Canadian ambassador David MacNaughton has received copies of letters sent by lawmakers to the White House on specific issues. But there is no NAFTA caucus in Congress with a high-profile leader taking charge of the file.

North Korea and China are much higher on Mr. Trump’s priority list than Canada. It’s still the case that Americans don’t yet understand that Canadians are their biggest customers. Canadian negotiators try to drive that point home, to warn that Canadians will not take kindly to being bullied on trade. But it’s hardly something Mr. Trump is worried about at this point. You’ve got to take out ads on Fox News, it was suggested to a Canadian official. “Maybe we will,” he said.

On NAFTA, Mexico is the major problem and Canada is caught up in the whirlwind. Our whole foreign policy has been affected to the degree that the Liberals have not spoken out strongly against some of Mr. Trump’s initiatives for fear of igniting his ire. It’s what you have to do when you’re the supplicant, when almost threequarters of your trade is dependent.

We have to care a lot. They don’t.

The Globe and Mail. REUTERS. 16 May 2018. Mexico says NAFTA deal unlikely this week, but Canada remains upbeat
SHARAY ANGULO, MEXICO CITY

Mexico’s Economy Minister said that he saw diminishing chances for a new North American free-trade agreement ahead of a Thursday deadline to present a deal that could be signed by the current U.S. Congress.

U.S. House Speaker Paul Ryan has said that the Republican-controlled Congress would need to be notified of a new NAFTA deal by Thursday to give lawmakers a chance of approving it before a newly elected Congress takes over in January.

“It is not easy. We do not think we will have it by Thursday,” Mexican Economy Minister Ildefonso Guajardo told broadcaster Televisa on Tuesday.

But Canadian Prime Minister Justin Trudeau struck a more upbeat tone, telling reporters in Calgary a few hours later, “There is very much an eminently achievable outcome … and we are very close.”

“We are going to continue to remain optimistic,” Mr. Trudeau said. He met with U.S. President Donald Trump on Monday and discussed the possibility of bringing NAFTA talks to a “prompt conclusion.”

Negotiators from the United States, Mexico and Canada have been in intense talks since last month to try to reach a deal before U.S. congressional elections in November. Mexico’s presidential vote on July 1 also complicates the process.

“We will keep negotiating, and in the moment that we have a good negotiation, we can close the deal … independent of which Congress [the current or new] that will vote on it,” Mr. Guajardo said.

Mexico’s peso sank to its weakest level in over a year on Tuesday, and the country’s benchmark stock index fell about 1 percent to its lowest since early April.

Mr. Guajardo said the talks could be concluded before or just after the July 1 vote.

Leftist Andres Manuel Lopez Obrador is leading polls to win the presidential race, and his pick for economy minister, Graciela Marquez, said last month his administration would be willing to accept a deal struck before the election.

If that is not possible, she said it would be better to complete the negotiation after the next government takes office at the start of December. Mr. Guajardo said the next government’s team would need to be involved in any talks after July 1.

Mr. Guajardo said negotiators were getting close to reaching a deal on rules for the auto sector under NAFTA.

However, talks still faced the hurdles of U.S. demands for a sunset clause that would allow NAFTA to expire if it is not renegotiated every five years, and the elimination of settlement panels for trade disputes.

More flexibility was needed for a deal, Mr. Guajardo said.

Hanging over the talks is Mr. Trump’s threat to impose steel and aluminum tariffs on its trade partners. Mexico and Canada have been spared so far, although the latest exemption for them will run out at the end of May.

The Globe and Mail. MAY 16, 2018. Canada says quick NAFTA deal still possible
ADRIAN MORROW, WASHINGTON
GREG KEENAN, AUTO AND STEEL AND AIRLINE INDUSTRY REPORTER, TORONTO

Canada is insisting that a quick NAFTA deal is still possible, even as negotiators look set to miss a deadline for finishing an agreement that could be approved by the U.S. Congress before the end of the year.

Kirsten Hillman, Ottawa’s deputy ambassador to the United States, said Wednesday that the three countries have a “common goal in getting a deal completed as soon as possible.”

“There are all the elements there for a deal,” Ms. Hillman told a North American free-trade agreement event organized by The Hill newspaper. “There is momentum now.”

One scenario receiving serious consideration would see the three NAFTA countries cut a deal on the crucial issue of content rules in the automotive industry and leave all other contentious areas in the agreement untouched, said people familiar with the backroom strategizing. Ms. Hillman acknowledged that such a deal is “a possibility.”

House of Representatives Speaker Paul Ryan has said negotiations must conclude by Thursday to give Congress enough time to pass a revised NAFTA before the current agreement expires at the start of next year. Under the U.S. system for trade negotiations, there are several months-long procedural hurdles that a deal must clear before it comes to a vote.

There are no plans for talks Wednesday between Foreign Minister Chrystia Freeland, U.S. Trade Representative Robert Lighthizer and Mexican Economy Minister Ildefonso Guajardo, the three ministers leading NAFTA negotiations, said one source with knowledge of the schedule.

Another source said the talks are effectively on hold as the Trump administration tries to sort out what Mr. Ryan’s deadline will mean.

But Ms. Hillman said there was still hope for getting something to Congress in time. “The runway for this Congress is very short – not impossible, nothing’s impossible until the deadline has passed,” she said.

In recent days, Canada and Mexico have cranked up the pressure on the Trump administration by signalling it can have the quick NAFTA deal it wants – but only if it is willing to drop or compromise on some of its most contentious demands.

The U.S. and Mexico are at loggerheads over an American proposal that 40 to 45 per cent of the content in vehicles manufactured in North America come from factories paying at least US$15 an hour. The demand is aimed at moving auto jobs to the U.S. and Canada and away from Mexico.

Mexican negotiators have signalled they could agree to bring in a wage threshold for some auto parts – as well as other U.S. demands to incentivize the use of more North American steel in NAFTA-zone vehicles – but not to the extent the U.S. is demanding, said sources with knowledge of the discussions.

The U.S. has also refused to budge on its other hardest proposals – including tough new Buy American rules for government contracts, the abolition of dispute-settlement mechanisms, a sunset clause that would kill the deal in five years unless all three countries agreed to keep it and the end of Canada’s protectionist tariff system for dairy products – until the autos issue is settled.

Prime Minister Justin Trudeau spoke by telephone with Mr. Trump earlier this week on NAFTA.

Mr. Guajardo said Mr. Trudeau told Mr. Trump Washington could have a deal “at any time,” so long as there was “flexibility from the parties” at the bargaining table.

In an interview Tuesday on Mexican television, Mr. Guajardo called on the U.S. to drop its demand for the sunset clause as well as a proposal to make the Chapter 20 system for resolving trade disputes between governments non-binding.

The U.S. is also seeking to scrap Chapter 19 – another dispute provision that Canada has successfully used to challenge American tariffs on softwood lumber. Canada has said it will not sign a deal that does not include Chapter 19.

“There is very much an imminently achievable outcome that will be good for the United States, good for Canada, good for Mexico. And we’re very close,” Mr. Trudeau told reporters in Calgary Tuesday.

Daniel Ujczo, an Ohio-based lawyer who specializes in Canada-U.S. trade, said he believed Mr. Trump would ultimately opt for a pact on autos – his top priority in talks – and set aside other tough demands.

“POTUS the deal-maker is coming in his closer role and trying to wrap up a ‘skinny’ version of the NAFTA,” Mr. Ujczo said.

The three countries are renegotiating the pact at the behest of Mr. Trump, who won election in part by pledging to bring manufacturing jobs back to the U.S.

Even if he can reach a deal with Canada and Mexico, however, the President faces further hurdles in getting Congress to approve a deal. His own Republican caucus is strongly in favour of NAFTA’s Chapter 11, which allows corporations to sue governments over unfavourable policy decisions at special trade panels. Mr. Lighthizer wants the U.S. to opt out of the system, which he argues encourages U.S. corporations to invest in Mexico by giving them an alternative to the local court system for settling disputes.

Congress could also be unhappy if a revised deal doesn’t contain any victories on congressional priorities, such as prying open the Canadian dairy market.

One possible option is for Mr. Trump to try to bypass Congress entirely and implement some changes to NAFTA by fiat. Whether he is actually allowed to do this is an open question: The NAFTA countries have made tweaks to auto-content rules in the past without congressional approval. But if he tried to make sweeping changes to the deal, he could end up in a legal battle with Congress.

With a report from The Canadian Press

The Globe and Mail. MAY 16, 2018. OPINION. Need a NAFTA deal on autos? Remove Mexico from the equation
JEFF RUBIN, senior fellow at the Centre for International Governance Innovation, an award winning author and the former chief economist and chief strategist at CIBC World Markets.

With Thursday’s deadline for the Trump administration to notify Congress of any new North American free-trade agreement (NAFTA) deal likely to have come and gone, maybe it’s time for Plan B. Chances of a new trilateral NAFTA 2.0 agreement for the critical auto sector look ever more remote, especially with the United States and Mexico at loggerheads over a minimum wage requirement to meet domestic content regulations. Meanwhile, the makings for a bilateral agreement between Canada and the United States is ready to be served, if not a comprehensive one than at least a sectoral one for the all-important auto industry – the biggest sticking point of the renegotiations.

Least Canadians forget, the auto sector was once home to arguably the best trade deal ever negotiated by Canada. Back in 1965, Canada and the United States implemented the Canada-United States Automotive Products Agreement, otherwise known as the Auto Pact. The agreement eliminated high Canadian duties on U.S. built vehicles but in return required American manufacturers, such as General Motors, Ford and Chrysler, to produce at least as many vehicles in Canada as they sold in the country.

The most efficient way to meet this requirement was to locate plants in Canada that had corporate mandates to produce for the combined Canadian and much larger U.S. marketplace. Suddenly, an inefficient Canadian auto industry was afforded a unique opportunity to achieve scale economies that were otherwise unobtainable in the small and highly fragmented domestic market. Canadian production boomed creating thousands of high paying auto jobs. Ontario became the largest auto producing jurisdiction in North America. By the turn of the century, Canada ranked as the fourth largest auto producer in the world. Today, it doesn’t even make the top 10.

During most of the Auto Pact’s tenure, Canadian vehicle production exceeded domestic sales. Yet the agreement still provided for reasonably balanced trade between the countries on the industry. In sharp contrast to both countries’ recent soaring trade deficits with Mexico, Canada ran a trade surplus in assembled vehicles that was partially offset by a trade deficit in auto parts.

Canada’s overall industry trade surplus with the United States was largely contained by counteracting movements in the assembly and parts trade balances. For example, if assembly production was increased at Canadian plants, so too would the level of parts being imported from the United States to support those assembly operations.

The Auto Pact was widely viewed as successful on both sides of the border. It’s no small coincidence that employment in both the American and Canadian auto industries peaked just prior to the formal termination of the agreement. In 2001, the World Trade Organization declared the agreement illegal since its production guarantees violated the rules-based trading system that the organization espouses. By then the Auto Pact had already been superseded by NAFTA whose provisions for duty-free trade encouraged both vehicle assembly companies and parts suppliers to move plants to Mexico; where they would pay workers an eighth of the wages that were paid to Canadian and American workers who eventually lost their jobs. The ensuing shift in supply chains took a similar toll on both Canadian and U.S. work forces in the industry, both of which have fallen by over a quarter. Meanwhile, employment in Mexico’s booming low wage assembly and parts industries has more than quadrupled.

The balanced trade that the Auto Pact provided is precisely the kind of fair and reciprocal trade agreement that the Trump administration is seeking with trading partners around the world. If a bilateral agreement were made, Canada and the United States would continue duty free trade in the sector while both countries would likely harmonize their tariff rates on Mexican-made made vehicles and parts (likely at a much higher rate than America’s current 2.5 per cent Most Favoured Nation rate) to prevent backdoor access to their markets.

With prospects for a new NAFTA deal on autos all but dead, a bilateral trade deal on autos with the United States is an option that Canada should seriously consider.

BANK OF CANADA. REUTERS. MAY 16, 2018. Bank of Canada says NAFTA uncertainty weighing on investment
Leah Schnurr, Andrea Hopkins

OTTAWA (Reuters) - Uncertainty about NAFTA renegotiations is one of the reasons the Bank of Canada has kept interest rates low, because concern about U.S. trade policy is dragging down business investment, Deputy Governor Lawrence Schembri said on Wednesday.

The central bank also has “a bit more room” than previously thought to support demand without sparking excessive inflation, because it has revised up its projected growth rate of potential output, Schembri said in a speech in Ottawa.

Schembri’s comments suggested a resolution of the North American Free Trade Agreement between Canada, the United States and Mexico could clear the way for higher rates. The Bank of Canada in April held interest rates steady after hiking three times since July 2017.

Schembri said the uncertainty over NAFTA has hampered investment and exports, but domestic consumer demand has companies running close to full capacity.

“That’s part of the reason why we believe that the economy is operating close to potential, inflation is less than (or) close to our target of 2 percent, yet monetary policy is below the neutral rate, in part because we have to lean against the drag coming from the uncertainty created by NAFTA,” Schembri said in response to an audience question.

The United States is pushing for a NAFTA deal, but Canadian and Mexican officials were not due in Washington for talks before a Thursday deadline.

The bank has long blamed worries about NAFTA for sluggish business investment. Some 75 percent of Canadian exports go to the United States, and any change to the trade agreement could imperil supply chains and profitability.

While analysts expect at least one more rate hike in 2018, the bank has said it will proceed cautiously given the uncertainty about NAFTA and the record levels of debt held by Canadian households.

Adding to his dovish comment, Schembri said the bank’s upward revision in April to its projected growth rate of potential output gives policymakers “a bit more room” than previously thought to support demand without sparking excessive inflation pressures.

“The higher the projected growth rate of potential output, the faster the economy can grow without inflation rising persistently above our target,” Schembri said in the speech.

“That means that, in the near term, we have a bit more room than we thought to support demand without sparking undue inflationary pressures.”

Reporting by Andrea Hopkins and Leah Schnurr; Editing by Frances Kerry and Lisa Shumaker

THE WHITE HOUSE. REUTERS. MAY 16, 2018. U.S. pushing for NAFTA deal as Thursday deadline approaches
Doina Chiacu, David Lawder

WASHINGTON (Reuters) - The United States is pushing for a deal in negotiations on a revised North American Free Trade Agreement (NAFTA), the White House said on Wednesday, but Canadian and Mexican officials were not due in Washington for talks before a Thursday deadline.

President Donald Trump is committed to getting a better agreement with Canada and Mexico, press secretary Sarah Sanders told Fox News.

“We still want to see something happen and we’re going to continue in those conversations. They’re ongoing now and we’re pushing forward and hopeful that we can get something done soon,” Sanders said.

On Tuesday, Mexico Economy Minister Ildefonso Guajardo said he saw diminishing chances for a new NAFTA agreement before a Thursday deadline to present a deal that could be signed by the current U.S. Congress.

Neither Guajardo nor Canadian Foreign Affairs Minister Chrystia Freeland had plans to travel to Washington on Wednesday, their representatives said.

U.S. House Speaker Paul Ryan has said that the Republican-controlled Congress would need to be notified of a new deal by Thursday to give lawmakers a chance to approve it before a newly elected Congress takes over in January.

Sanders did not address the timeline.

“We’ve got to get a deal that works for everybody, but most importantly this president is going to make sure that we get a deal that works for America,” she said. “He’s not going to stop until he gets it.”

Ryan said Congress cannot begin working on the negotiating law known as “fast track” without a trade deal in hand.


“The point is, we can’t work a bill unless we have an agreement that’s in writing that we can work on, and that hasn’t occurred yet,” Ryan told reporters at the U.S. Capitol.

Mexico’s chief NAFTA trade negotiator, Kenneth Smith, told Mexican radio MVS Noticias that negotiations would continue.

“What Congressman Ryan is talking about is not a final deadline for negotiations between the three nations,” he said.

Smith said the administration of President Enrique Pena Nieto had a responsibility to continue negotiating until Mexico’s new president, who will be elected on July 1, takes office on Dec. 1.

If a NAFTA deal is not reached before the election, Mexico’s negotiators will work closely with the incoming government’s transition team, Smith said.

U.S. Representative Kevin Brady, the chairman of the tax and trade-focused House Ways and Means Committee, said there was probably little room to go past the Thursday deadline for a deal and still get a new NAFTA approved by year end.

Asked if talks could go beyond May 17, he said: “That timetable’s right in the area there. That’s a pretty accurate timetable.”

Leftist Andres Manuel Lopez Obrador is leading polls to win the Mexican presidential race. His pick for economy minister, Graciela Marquez, has said his administration would be willing to accept a deal struck before the election.

Additional reporting by David Ljunggren in Ottawa, Frank Jack Daniel and Anthony Esposito in Mexico City; Editing by Jeffrey Benkoe and Cynthia Osterman

INTERNATIONAL TRADE

US. CHINA. 16 The Globe and Mail. BLOOMBERG. May 2018. Businesses bash U.S. tariffs as China talks escalate. Trump administration plans to impose tariffs on $50-billion in Chinese goods as Beijing threatens retaliation
MARK NIQUETTE
ANDREW MAYEDA

Tension between the United States and China has roiled financial markets and raised fears the world’s two biggest economies may stumble into a trade war.

U.S. companies and business groups are lining up to oppose the Trump administration’s plan to slap tariffs on Chinese imports, as the two countries step up efforts to resolve their trade dispute.

About 120 firms and industry groups are scheduled to testify at a hearing beginning Tuesday on the administration’s plan to impose tariffs on US$50-billion in Chinese goods. So many groups signed up that the U.S. Trade Representative’s Office extended the hearing by two days until Thursday. The USTR has received more than 2,700 comments.

The hearing coincides with a planned trip to Washington by Chinese President Xi Jinping’s top economic adviser for broader trade negotiations. The visit is a follow-up to talks led by U.S. Treasury Secretary Steven Mnuchin in Beijing earlier this month, when they failed to bridge their wide differences.

Companies including U.S. Steel Corp., Best Buy Co., and General Electric Co., as well as lobby groups such as the National Retail Federation, Consumer Technology Association and National Association of Manufacturers, are set to testify this week. While they’re generally supportive of U.S. action to level the playing field on trade and investment with China, many want the talks to focus on resolving differences rather than the pursuit of tariffs.

Sanden International (U.S.A.) Inc., based in Wylie, Tex., which makes automotive air-conditioning compressors, estimated the proposed tariffs on the components it imports from China would require the firm to pay an additional US$3.5-million in duties a year.

George Tuttle III, a lawyer testifying on behalf of the company, said the firm would need to cut 39 people from its 431 employees in Wylie if the tariffs go into effect and defer or cancel additional capital investment.

Some companies, such as AK Steel Corp., are in favor of U.S. President Donald Trump’s plans to slap duties on Chinese goods to punish the Asian country for abuse of U.S. intellectual property. SolarWorld Americas asked the administration to add solar cells and modules to the list of products the United States has proposed for tariffs. Chinese hackers stole thousands of sensitive files from SolarWorld beginning in 2012, paving the way for lower-cost Chinese competitors to enter the market earlier than expected, said Tim Brightbill, a lawyer with Wiley Rein LLP in Washington who testified for the company.

“SolarWorld and the domestic solar industry have been devastated by the Chinese government’s policies and practices with respect to technology, intellectual property and innovation,” Mr. Brightbill said.

In January, Mr. Trump imposed new safeguard tariffs on solar panel imports to protect American manufacturers against cheaper competition, benefiting SolarWorld.

U.S. manufacturers, consumer-products companies and technology groups that filed written submissions opposing the planned Chinese tariffs say they would raise input costs and consumer prices and draw crippling retaliatory duties from China.

“Tariffs are hidden, regressive taxes that will be paid by U.S. businesses and consumers, paradoxically harming U.S. competitiveness,” the U.S. Chamber of Commerce said in written testimony filed before the hearing.

The industry backlash against the planned tariffs comes amid signs the President may be seeking a less confrontational approach to Beijing. In a surprise twist, Mr. Trump said on Sunday he’s working with Mr. Xi to get ZTE Corp. “back into business fast.”

Mr. Trump’s pledge to help ZTE may bode well for continuing trade talks between the world’s two biggest economies. Vice-premier Liu He, Mr. Xi’s top economic aide, is expected to visit Washington from May 15-19 for high-level trade negotiations.

Tension between the United States and China has roiled financial markets and raised fears the world’s two biggest economies may stumble into a trade war.

Mr. Trump proposed the tariffs after USTR concluded China violates U.S. intellectual property in a variety of ways, including by forcing American companies to transfer technology.

After China promised to retaliate with tariffs in kind on soybeans and other U.S. exports, Mr. Trump suggested the amount should be raised by US$100-billion. The United States hasn’t released a list to meet that expanded goal, and the administration hasn’t specified when any of the duties will take effect, opening the door to companies to try to shape Mr. Trump’s plans.

US. CHINA. REUTERS. MAY 16, 2018. China denounces trade unilateralism, defends free trade

PARIS (Reuters) - China’s foreign minister on Wednesday took a swipe at the United States’ trade policy and defended international free trade on the basis of World Trade Organisation regulations.

“Trade unilateralism goes against the current of history,” Wang-Yi said alongside his French counterpart Jean-Yves Le Drian speaking through an interpreter. “We must preserve international free trade on the basis of WTO rules.”

The two foreign ministers also agreed to the need to maintain the Iran nuclear deal.

Reporting by John Irish; Editing by Richard Balmforth

US. CHINA. REUTERS. MAY 16, 2018. Trump tweets: China has 'much to give' in trade negotiations

WASHINGTON (Reuters) - U.S. President Donald Trump said in tweets on Wednesday that “nothing has happened” with China’s ZTE Corp (000063.SZ) and that Beijing has “much to give” Washington on trade, denying suggestions that his administration was “folding” in negotiations with Beijing.

Trump on Monday had defended his decision to revisit penalties on ZTE for flouting U.S. sanctions on trade with Iran, in part by saying it was reflective of the larger trade deal the United States is negotiating with China.

“Nothing has happened with ZTE except as it pertains to the larger trade deal,” Trump said on Twitter.

“We have not seen China’s demands yet, which should be few in that previous U.S. Administrations have done so poorly in negotiating. The U.S. has very little to give, because it has given so much over the years. China has much to give!”

The Trump administration has yet to reveal any details of trade talks expected this week between a delegation led by China’s Vice Premier Liu He, the top economic adviser to President Xi Jinping, and senior Trump administration officials.

Liu is due on Capitol Hill on Wednesday afternoon for meetings with members of the trade-focused House Ways and Means Committee as well as with Senate Finance Committee Chairman Orrin Hatch, congressional aides said.

U.S. lawmakers on Tuesday rejected any plan by Trump to ease restrictions on ZTE, calling the telecommunications firm a security threat and vowing not to abandon a Commerce Department ruling that bans sales of American components and software to the company for violating terms of a sanctions settlement deal.

The ban has caused ZTE to cease operations, and Trump on Sunday tweeted that he had instructed the U.S. Commerce Department to take steps that would restore ZTE’s ability to operate.

A group of 33 Democratic senators signed a letter urging Trump to instead focus on strategies to change China’s trade practices, such as eliminating market-distorting subsidies and forced technology transfers.

“Offering to trade American sanctions enforcement to promote jobs in China is plainly a bad deal for American workers and for the security of all Americans,” wrote the senators, led by Senate Democratic Leader Chuck Schumer. “America’s policies toward China should put American workers, farmers and businesses first, not China’s.”

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Trump tweeted on Wednesday: “There has been no folding as the media would love people to believe, the meetings haven’t even started yet!”

Reporting by Doina Chiacu and David Lawder; Editing by Chizu Nomiyama and Susan Thomas

VENEZUELA

REUTERS. MAY 15, 2018. Exclusive: As Venezuelans suffer, Maduro buys foreign oil to subsidize Cuba
Marianna Parraga, Jeanne Liendo

HOUSTON (Reuters) - Venezuela’s state-run oil firm PDVSA has bought nearly $440 million worth of foreign crude and shipped it directly to Cuba on friendly credit terms - and often at a loss, according to internal company documents reviewed by Reuters.

The shipments are the first documented instances of the OPEC nation buying crude to supply regional allies instead of selling them oil from its own vast reserves.

Venezuela made the discounted deliveries, which have not been previously reported, despite its dire need for foreign currency to bolster its collapsing economy and to import food and medicine amid widespread shortages.

The open-market oil purchases to subsidize one of Venezuela’s few remaining allies underscores its increasing global isolation and the disintegration of its energy sector under socialist President Nicolas Maduro.

The purchases came as Venezuela’s crude production hit a 33-year low in the first quarter - down 28 percent in 12 months. Its refineries are operating at a third of capacity, and its workers are resigning by the thousands.

PDVSA bought the crude for up to $12 per barrel more than it priced the same oil when it shipped to Cuba, according to prices on internal documents reviewed by Reuters. But Cuba may never pay cash for the cargoes because Venezuela has long accepted goods and services from Cuba in return for oil under a pact signed in 2000 by late presidents Hugo Chavez and Fidel Castro.

PDVSA, the Venezuela government and the Cuba government did not respond to requests for comment.

Venezuela’s government has previously said it only imports oil to blend with its own tar-like crude to improve quality and create an exportable product, or to feed its refinery in Curacao. But hundreds of PDSVA documents examined by Reuters detailing imports and exports, dated from January 2017 to May of this year, show the company is now buying crude at market prices to deliver to allies - in shipments that never pass through Venezuela.

The subsidized deliveries are aimed at maintaining political support from Cuba, one of a dwindling group of Venezuela allies, according to diplomats, politicians and PDVSA executives.

“Maduro is giving away everything he can because these countries’ backing, especially from Cuba, is all the political support he has left,” said a former top Venezuelan government official who declined to be identified.

Late Tuesday, a leader of the political opposition to Maduro, Henrique Capriles, reacted to Reuters’ disclosure of the oil shipments to Cuba by tweeting: “Venezuelans are suffering the worst crisis without food or medicine, our oil is about to be seized due to PDVSA’s debts, and they continue irresponsibly buying oil to give it away to other countries. They don’t care!”

Caracas has come under increasing international pressure as the United States, the European Union and Canada have sanctioned Venezuela for what they see as Maduro’s attempts to cement a dictatorship.

As Venezuela spends on oil imports, it has imported less of everything else its citizens desperately need. Venezuela’s spending on non-oil imports plunged from nearly $46 billion in 2011 to $6 billion in 2017, according Venezuela Central Bank data and Ecoanalitica, a Caracas-based economic research organization.

The oil PDVSA procured for Cuba was Russian Urals crude, the documents show, a variety well-suited for Cuban refineries constructed from Soviet-era equipment.

PDVSA bought the crude from Chinese, Russian and Swiss firms – not for cash, but a pledge that PDVSA would deliver other oil shipments later, the documents show.

That adds to Venezuela’s already towering debts of oil to state-owned firms in Russia and China, which together have extended Venezuela’s government more than $60 billion in oil-for-loan deals that have propped up its budget amid declining exports and lower oil prices.

“It’s nonsense to import oil to keep subsidized exports flowing,” said Ecoanalitica President Asdrubal Oliveros.

PETRO-DIPLOMACY

Venezuela’s socialist government has long used oil for domestic and international political ends, subsidizing goods and services at home and currying favor across the region with oil deliveries on generous terms.

Venezuela’s oil supply arrangements have helped soften international political censure of Maduro’s government.

The Organization of American States (OAS), which includes most Western Hemisphere nations, last year took up a motion seeking to pressure Venezuela to hold free elections, liberate political prisoners and declare a humanitarian crisis.

The effort was defeated when 12 countries that have received regular oil shipments from Venezuela in recent years - about a third of the OAS membership - opposed it or refused to vote. Eventually, the OAS passed a watered-down motion urging free and fair elections.

Venezuela has avoided formal OAS condemnation “thanks to the support of the bloc of Caribbean nations that have benefited from its subsidized oil and development programs for years,” said Michael Fitzpatrick, deputy assistant secretary in the U.S. State Department’s Bureau of Western Hemisphere Affairs, said on April 30 during a talk at the Atlantic Council, a foreign policy think tank in Washington.

Most of those countries are members of Venezuela’s Petrocaribe trade pact, launched in 2005, which has granted up to 16 Caribbean and Central American states with oil supplies on favorable terms.

OAS President Luis Almagro declined to comment through press office representative Monica Reyes.

El Salvador’s Economy Minister, Luz Estrella Rodriguez, said Petrocaribe and other pacts promoted by Venezuela had played an important role in her country’s development.

“Our country is very grateful,” she said. “The government of El Salvador, of course, is a friend and an ally of the Venezuelan government.”

El Salvador refused to vote last year on the OAS motion to condemn Venezuela.

Venezuela also supplied fuel last year to Nicaragua, the Dominican Republic, Haiti and Dominica, the documents show.

In total, members of oil trade pacts with Venezuela last year received at least 103,000 bpd of crude and refined products from PDVSA, the documents show, or about 6 percent of Venezuela’s exports.

FALLING OUTPUT, SHRINKING IMPORTS

The falling output of Venezuela’s refineries has also left the country increasingly dependent on fuel imports to meet domestic consumption.

The internal PDVSA data reviewed by Reuters shows Venezuela last year purchased some 180,000 barrels per day of foreign crude and refined products from PetroChina, Rosneft, Lukoil, Reliance Industries and other suppliers, 17 percent more than in 2016.

Those companies did not respond to requests for comment.

The purchases totaled more $4 billion, according to PDVSA records.

Last year, total oil-industry purchases, including equipment and services, consumed 45 percent of Venezuela’s total import spending, up from 13 percent in 2011, Ecoanalitica data shows. Energy imports totaled $5.4 billion out of $11.9 billion.

The resulting scarcity of food, medicine and employment has caused thousands of citizens to flee Venezuela. The pay of PDVSA workers now can’t cover the barest essentials because of the collapse of its currency, the bolivar.

“A worker’s salary is not even enough for a box of eggs,” said Hector Bertis, a PDVSA worker and union leader. “We go to the bank, and they give us 10,000 bolivars - less than what a transportation fare costs.”

Reporting by Marianna Parraga in Houston and Jeanne Liendo in Calgary; additional reporting by Alexandra Ulmer in Washington, Paula Rosales in San Salvador, Gary McWilliams in Houston and Mircely Guanipa in Punto Fijo; Editing by Gary McWilliams, Simon Webb and Brian Thevenot

INDUSTRY

StatCan. 2018-05-16. Monthly Survey of Manufacturing, March 2018

• Manufacturing sales: $57.1 billion, March 2018, 1.4% increase (monthly change)
• Inventories: $79.2 billion, March 2018, 0.7% increase (monthly change)
• Inventory-to-sales ratio: 1.39, March 2018, -0.01 pts decrease (monthly change)
• Unfilled orders: $88.6 billion, March 2018, 1.5% increase (monthly change)
• Source(s): CANSIM table 304-0014: http://www5.statcan.gc.ca/cansim/a26?lang=eng&retrLang=eng&id=3040014&&pattern=&stByVal=1&p1=1&p2=31&tabMode=dataTable&csid=

Manufacturing sales rose 1.4% to $57.1 billion in March. Higher sales at primary metal; aerospace product and parts; fabricated metal product; and the other transportation equipment industries were mostly responsible for the increase.

Overall, sales were up in 13 of 21 industries, representing 72% of the Canadian manufacturing sector.

Chart 1: Manufacturing sales rise

In volume terms, manufacturing sales rose 0.6%.

The primary metal and aerospace product and parts industries post the largest gains

Primary metal sales rose 4.2% to $4.4 billion in March following a 4.4% increase in February. While the growth in sales in dollar terms was widespread, the iron and steel mills and ferro-alloy as well as the alumina and aluminum production and processing industries posted the largest sales gain in March.

In the aerospace industry, production rose 10.6% in March following a 4.0% gain in February. The depreciation of the Canadian dollar contributed to a rise in the value of sales and inventories. Most sales and inventories held in the industry are priced in US dollars, and both are key components in the calculation of aerospace production.

Sales were also up in the fabricated metal product (+4.6%), other transportation equipment (+37.4%) and wood product (+3.7%) industries.

These increases were partially offset by declines in the motor vehicle (-2.0%), machinery (-1.7%) and computer and electronic product (-3.4%) industries.

Sales up in seven provinces

Sales were up in seven provinces in March, with Quebec and British Columbia responsible for most of the total national gain.

In Quebec, sales rose 2.9% to $13.8 billion in March, mainly due to a 21.3% increase in the aerospace product and parts industry. Sales also rose in the primary metal; machinery; and fabricated metal product industries.

Sales in British Columbia increased 4.0% to $4.6 billion in March, following four consecutive monthly declines. The increase was largely attributable to higher sales in the wood product industry.

In Saskatchewan, sales rose 5.6% to $1.5 billion. Higher sales in the food industry (+27.7%) were responsible for the gain. Greater availability of rail cars in March allowed more food products to be processed and shipped, leading to higher sales compared with February. Excluding the food industry, sales in the province declined 1.4%.

Sales were down in Manitoba, Nova Scotia and Prince Edward Island due to lower sales of durable goods.

Inventory levels rise

Chart 2: Inventories rise

Inventory levels increased 0.7% to $79.3 billion in March. This was the sixth consecutive increase in inventories, with 6 of 21 industries posting higher levels. The gains were attributable to the transportation equipment (+3.5%), chemical (+5.9%) and plastic and rubber products (+5.3%) industries.

Chart 3: The inventory-to-sales ratio declines

The inventory-to-sales ratio declined from 1.40 in February to 1.39 in March. The inventory-to-sales ratio measures the time, in months, that would be required to exhaust inventories if sales were to continue at their current pace.

Unfilled orders increase

Unfilled orders rose 1.5% in March to $88.6 billion, a second consecutive monthly increase. The advance reflected a gain in the aerospace product and parts industry, up 2.4% to $47.1 billion, representing more than half of total unfilled orders.

Chart 4: Unfilled orders increase

Table 304-0014 ^1, 2, 3
Manufacturers' sales, inventories, orders and inventory to sales ratios, by North American Industry Classification System (NAICS), Canada
monthly (dollars unless otherwise noted)

• Tab 1:Data table
• Tab 2:Add/Remove data
• Tab 3:Manipulate
• Tab 4:Download
• Tab 5:Related information
• Tab 6:Help

Data table

The data below is a part of CANSIM table  304-0014.  Use the  Add/Remove data  tab to customize your table.

Selected items [Add/Remove data]

Geography = Canada
North American Industry Classification System (NAICS) = Manufacturing [31-33 ]

Principal statistics	Seasonal adjustment	2017		2018
		November	December	January	February	March
footnotes
Sales of goods manufactured (shipments)	Unadjusted (x 1,000)	57,720,734	52,288,828	52,291,832	51,628,440	58,947,604
	Seasonally adjusted (x 1,000)	55,798,105	55,926,106	54,879,361	56,375,201	57,141,004
New orders, estimated values of orders received during month	Unadjusted (x 1,000)	56,816,220	51,864,331	52,819,551	54,194,720	60,455,308
	Seasonally adjusted (x 1,000)	54,938,860	55,494,040	54,843,935	58,879,932	58,478,108
Unfilled orders, estimated values of orders at end of month	Unadjusted (x 1,000)	84,635,251	84,210,753	84,738,473	87,304,753	88,812,456
	Seasonally adjusted (x 1,000)	85,236,006	84,803,940	84,768,514	87,273,245	88,610,349
Raw materials, fuel, supplies, components, estimated values at end of month	Unadjusted (x 1,000)	31,591,577	31,857,769	32,199,892	32,972,141	32,888,008
	Seasonally adjusted (x 1,000)	31,857,730	31,980,904	31,997,584	32,541,893	32,347,269
Goods or work in process, estimated values at end of month	Unadjusted (x 1,000)	20,414,438	19,004,787	19,946,256	20,541,031	20,476,508
	Seasonally adjusted (x 1,000)	19,942,867	19,921,554	19,978,125	20,223,935	20,542,373
Finished goods manufactured, estimated values at end of month	Unadjusted (x 1,000)	24,960,934	24,655,192	25,424,505	26,173,031	26,779,283
	Seasonally adjusted (x 1,000)	25,122,290	25,378,343	25,540,033	25,940,706	26,351,942
Total inventory, estimated values of total inventory at end of the month	Unadjusted (x 1,000)	76,966,949	75,517,747	77,570,654	79,686,203	80,143,798
	Seasonally adjusted (x 1,000)	76,922,887	77,280,801	77,515,742	78,706,534	79,241,584
Ratio of total inventory to sales	Unadjusted	1.33	1.44	1.48	1.54	1.36
	Seasonally adjusted	1.38	1.38	1.41	1.40	1.39
Ratio of finished goods to sales	Unadjusted	0.43	0.47	0.49	0.51	0.45
	Seasonally adjusted	0.45	0.45	0.47	0.46	0.46

Footnotes:

1.

All data up to December 2003 are calibrated to levels from the Annual Survey of Manufactures and Logging (ASML). Starting in January 2004, the data are reconciled with the ASML, but the aggregate industry estimates may be different.

2.

Beginning with reference year 2009, the data are classified by industry based on the North American Industry Classification System (NAICS) 2012.

3.

With the release on May 16, 2018, the Monthly Survey of Manufacturing (MSM) has published revised estimates. Estimates of sales of goods manufactured, inventories and orders have been revised back to January 2013 for the unadjusted data, and back to January 2011 for the seasonally adjusted data.

Source:  Statistics Canada. Table  304-0014 -  Manufacturers' sales, inventories, orders and inventory to sales ratios, by North American Industry Classification System (NAICS), Canada, monthly (dollars unless otherwise noted),  CANSIM (database). (accessed: )

FULL DOCUMENT: http://www.statcan.gc.ca/daily-quotidien/180516/dq180516a-eng.pdf

StatCan. REUTERS. MAY 16, 2018. Canada March factory sales up 1.4 percent on metals, aerospace

Canadian factory sales grew by 1.4 percent in March from February on higher sales in the primary metal and aerospace product and parts industries, Statistics Canada said on Wednesday.

Excluding vehicles and parts, manufacturing sales were up 1.8 percent.

Reporting by Dale Smith

CONSULAR ISSUES

The Globe and Mail. 16 May 2018. Ottawa has made $1-billion from new passport fees
MICHELLE ZILIO, PARLIAMENTARY REPORTER OTTAWA

The federal government has made more than $1-billion in profits from its passport program since significantly increasing the cost of a Canadian passport five years ago, according to newly released documents.

Canadian adults pay anywhere from $120 to $160 for an adult passport, despite the fact that it only cost the government $69.23 to produce the 36-page travel document in the 2016-17 fiscal year, according to immigration documents provided to The Globe and Mail by Vancouver-based immigration lawyer Richard Kurland. The price increase appears to have contributed to hundreds of thousands of dollars in annual surpluses for the passport program from 2013 to 2017, totalling more than $1-billion over four years.

Mr. Kurland, who obtained the data under the Access to Information Act, said it is inappropriate for Ottawa to profit off the backs of Canadian taxpayers.

“A billion dollars made in just four years is a lot of money and the money comes directly from individual Canadians who are overpaying for their Canadian passports,” Mr. Kurland said in an interview.

“Instead of keeping the profit, they should be lowering the passport fee.” Former prime minister Stephen Harper’s government increased the cost of passports in 2013 in an effort to cover the nearly $5 it was losing every time it issued a passport. In addition to boosting the cost of a five-year passport from $87 to $120, the government also started providing a 10-year passport at a cost of $160, increased the cost of a child’s passport by $20 to $57 and introduced a $45 replacement fee for lost or stolen documents.

Canadians ordering passports from outside of the country face the biggest fees today – $190 for a five-year passport or $260 for the 10-year document.

Immigration, Refugees and Citizenship Canada (IRCC) said in a statement that the passport program operates on a “cost-recovery basis,” meaning it finances its operations entirely from fees charged for passports and other travel documents. IRCC spokesperson Nancy Caron said the program is currently in the middle of its 10-year business cycle, which started in July, 2013, and plans to use revenue from the first half of that period to offset the anticipated drop in demand for passports as a result of the 10-year passport option.

“No changes are currently planned to the passport fee structure. The passport program closely monitors its financial status to ensure that it is in compliance with all relevant authorities governing the program,” Ms. Caron said.

However, NDP immigration critic Jenny Kwan called on the government to conduct a full review of the passport-fee structure.

“The cost of the processing fees for passports should reflect the actual cost itself,” Ms. Kwan said.

Ms. Kwan said high passport costs limit the ability of low-income Canadians to obtain the important travel document. For instance, she said, many seniors in her Vancouver-area riding have complained about the high cost of a passport on a fixed income.

The Conservatives declined to comment on the passport-program profits.

ECONOMY

BANK OF CANADA. May 16, 2018. The (Mostly) Long and Short of Potential Output. Remarks. Lawrence Schembri - Deputy Governor. Ottawa Economics Association and CFA Society Ottawa. Ottawa, Ontario

Introduction

Thank you for inviting me here today.

An important, if sometimes underappreciated, purpose of central bank speeches is to help the public understand what we are trying to achieve, and why. A greater understanding of our monetary policy actions helps make them more effective. And as a public institution, we have an obligation to highlight and demystify the concepts that guide our thinking in a way that all interested citizens, not just the experts in this room, can grasp.

Few in the public likely give much thought to potential output, for example. Yet this somewhat abstract notion is vital to how most central banks evaluate inflationary pressures and conduct monetary policy. At the Bank of Canada, being able to estimate and project potential output has contributed notably to our strong track record of meeting our inflation objectives.

At the same time, the dynamics of potential output are primarily shaped by slow-moving forces that can take time to have a material impact, such as demographic shifts, capital accumulation and technological change. Equally important, many of these same forces influence a country’s standard of living.

A significant development in recent decades is that growth in potential output has been on a generally downward trend in most major advanced economies, including Canada, largely owing to the aging of our populations. This trend has important implications for our macroeconomic policy frameworks and for our economic prospects.

My remarks today are organized around four separate but closely related questions:

• What is potential output?
• How do we measure it?
• Why is it important for policy?

What policies have supported potential output growth in the past and could again in the future?
The answers to these questions should help you better understand not only our policy in the near term, but also our thinking about policy-making over a longer horizon.

What is potential output?

Turning to the first question, we usually refer to “potential” in the context of individual achievement, as in “realizing one’s potential.” When I was much younger, for example, my aspirations for my own potential included growing as tall as my favourite player on the Dallas Cowboys, becoming a pitcher for the Toronto Blue Jays, and obtaining a PhD. My immigrant parents placed more value on education than sports, so they were quite relieved that I only managed two out of three.

Central banks apply “potential” in a similar way—to assess what an entire economy, rather than a single person, can achieve on a sustainable basis. So “potential” can be viewed as a measure of aggregate, or total, supply in an economy. Essentially, it refers to an economy’s capacity to produce goods and services when all available productive resources—specifically, labour and capital—are used to their fullest.

In practice, we pay close attention to the growth rate of potential output as well as to its level. An economy’s productive capacity is normally always growing as available resources and their productivity expand. But the speed at which potential output grows has important short- and long-run implications. In the short run, the rate of potential output growth indicates how quickly an economy can grow on an ongoing basis without stoking inflationary pressures. In the long run, potential output growth is a useful gauge of an economy’s prospects, namely the outlook for national income and standard of living, because these are largely determined by the forces of supply.

Digging a little deeper, most central banks including the Bank of Canada-, interpret an economy’s actual output growth, its gross domestic product (GDP), as being determined in the short run by the forces moving aggregate demand. An economy’s potential output growth, meanwhile, reflects the evolution of aggregate supply over a longer horizon (Chart 1).1 Aggregate demand growth tends to move with short-term factors—such as shocks to foreign demand and exports—which may trigger cyclical movements in, for example, inventories and consumer purchases of durable goods. Aggregate supply growth is affected more by the slow-moving forces that I noted earlier.

So, a central challenge in pinning down potential output growth is disentangling the short-term fluctuations in GDP caused by demand shocks from long-term fluctuations that are due to the underlying forces that affect aggregate supply.2 Since the forces that determine aggregate supply tend to change slowly, we focus on trends when thinking about and measuring potential.

Now, it’s rarely as simple as just separating short-term phenomena from long-term. The Great Recession was a once-in-a-lifetime shock to aggregate demand that, because of its severity, also affected aggregate supply. Consequently, a decade later, this experience continues to have an impact on potential output in advanced economies. So, the disentanglement challenge is two-fold: first, identifying the trend movements, as opposed to temporary or cyclical ones; then, identifying the forces driving the trend movements, which also helps us predict how long they’ll persist.

I’ll go into more detail shortly about how we measure potential output growth. But one way to look at it is to break it into two components:

• the long-run growth rate of total hours worked in the economy—known as trend labour input (TLI); and
• the long-run growth rate of how much output is produced per hour of work—known as trend labour productivity (TLP).

To illustrate the TLI-TLP decomposition, Chart 2 shows each component’s respective contributions to Canadian potential output growth since 1992.3 The chart reflects the findings of the Bank’s annual reassessment of potential output growth, which we recently published as an appendix to our April Monetary Policy Report (MPR).

Two observations are important. First, the chart shows a secular, or persistent, decline in TLI and, thus, in potential output growth. Population aging is the biggest reason, and it is only partly offset by immigration.4 Second, TLP’s contribution to potential output growth has also declined somewhat from the period before the global financial crisis.

TLP growth is expected to increase modestly in the coming years. This is mainly because the slowdown in investment and productivity growth that followed the sharp decline in commodity prices in 2014–15 turned out to be less pronounced than we initially expected, and the economy’s adjustment from it is now mostly behind us. That is good news because TLP growth is expected to play a larger role in potential output growth over the projection and beyond. There is, however, considerable debate about how much we can expect productivity growth to rise in the future, even as the emerging digital economy promises to transform how firms operate and how they use their workforces.5

Canada’s experience is similar to that of other advanced economies. Chart 3 shows that potential output growth in Japan, the United States and key countries in the euro area is also much lower now than it was in the 1980s, largely due to the same forces causing the slowdown in Canada. For Canada specifically, the Bank’s reassessment found that annual potential output growth from 2009 to 2021 would average 1.8 per cent, much lower than the 2.7 per cent average from 1982 to 2008.

With all of this in mind, let’s tackle the hard question of how to measure potential output.

How do we measure potential output?

The main challenge in measuring potential output is that it is hypothetical, so it is not directly observable. We can only estimate it. Over the years, though, the Bank has put a lot of research effort into refining our methods for assessing this very important variable.

Techniques for estimating potential output growth can be viewed as being along a spectrum (Chart 4). At one end are simple statistical models that aim to capture underlying trends in output growth by mechanically filtering out short-term fluctuations. The problem with these techniques is they are essentially a “black box”—the data going in and the estimates coming out are known, but there’s little economic explanation of how they are connected. At the other end of the spectrum are structural models that rely primarily on relationships between variables, based on economic theory, to identify and quantify the impacts of different sources of potential output growth. For example, higher levels of investment will cause the capital stock to rise faster, leading to more rapid TLP and potential output growth. However, structural models may produce inaccurate estimates if the economic theory on which they are based is incorrect or incomplete.

To help manage the uncertainty around measuring potential output growth, the Bank uses a variety of models along this spectrum that combine statistical filters and theory-based structural approaches.

This is done so that we can cross-check the estimates from each model and then combine them to get a reasonably robust assessment.6 Chart 5, for example, displays estimates for potential output growth from four separate models along the spectrum that are part of the Bank’s staff tool box.7

Models that incorporate an economic structure are especially useful for projecting TLP growth, since TLP is based on variables and relationships that are difficult to measure and predict. TLI growth is comparatively easier to forecast because it is based on accurately observed labour market outcomes: the employment rate, the working-age population and average hours worked.

In contrast, TLP growth depends on two variables that are less concrete and therefore more challenging to observe precisely. The first of these, capital deepening, is a measure of growth in the ratio of capital per hour worked.8 The second is a more elusive concept called trend total factor productivity, or TFP. While we have some observable measures of investment and capital stock growth, we do not have the same for trend TFP—which essentially includes everything affecting firms’ productivity that isn’t captured by capital stock growth. These “residual” factors include, for example, technological improvements and the impact of education and training.9

Another way that the Bank manages the uncertainty around potential output growth is by conducting an in-depth review of our projections on an annual basis. First, economic data are regularly revised, so for that reason alone an annual review makes sense. Also, our empirical techniques are “living” in a sense—we are continually improving them as we learn from experience and ongoing research.10

Plus, in the annual reassessment, we further account for uncertainty by publishing ranges around our estimates and projections that expand with time. We also list the factors that could lead potential growth to be lower or higher within those ranges.11

I would like to stress that the Bank recognizes the difficulties associated with measuring potential and the related uncertainty, and so takes a deliberate and rigorous approach to managing this uncertainty. We work hard to ensure that our models evolve in line with prevailing best practices. And on top of using multiple techniques, we corroborate the models’ results against other measures of capacity and inflation, and then apply well-informed judgment. Finally, the uncertainty around these estimates is taken into account in the formulation of monetary policy. This helps us ensure that our estimates and our policy decisions are consistent with our broader economic outlook.

Now, let me expand on why potential output is important for policy.

Why is potential output important for policy?

The conduct of monetary policy

For the conduct of monetary policy, the difference between the level of actual and potential output—the “output gap”—is a critical element.12 It indicates how much slack there is in the economy, and so it is an important determinant and useful gauge of underlying inflationary pressures. As an inflation-targeting central bank, the Bank of Canada’s assessments of both the current output gap and its projected evolution have direct bearing on our inflation outlook and policy decisions. Because monetary policy operates with a well-known lag, the Bank must be forward-looking as we set the policy interest rate to affect aggregate demand, close any output gap and return inflation to target on a sustainable basis.

A higher level of potential output for a given level of GDP will mean a more “negative” output gap—implying (other things being equal) inflation below the 2 per cent target, greater economic slack and a possible need to ease the policy rate—and vice versa. Along with the output gap, expectations of inflation are also important in explaining current inflation. As inflation targets have become more credible, expectations have become better anchored at the target rate and, in turn, have had a larger influence on inflation itself.13

To illustrate the relationship between the output gap and inflation, consider Chart 6. It shows that the Bank’s three measures of core inflation all increased steadily over the past year following, with a short lag, the narrowing of our measure of the output gap. This demonstrates how we use other data to corroborate our estimates of the output gap, which helps ensure a coherent economic outlook.

The higher the projected growth rate of potential output, the faster the economy can grow without inflation rising persistently above our target. For example, our 2018 reassessment revised the profile for potential higher than it was in the 2017 reassessment, both in terms of its level and growth rate. That means that, in the near term, we have a bit more room than we thought to support demand without sparking undue inflationary pressures.

Challenges to the monetary policy framework

Although the inflation-targeting framework has been very successful in the past, looking ahead, the decline in potential output growth in many advanced economies represents a notable challenge and has prompted central banks in those countries to revisit their monetary policy frameworks.14

Let me explain. Lower potential output growth in advanced economies is one of the factors likely contributing to a decline in global real interest rates. For monetary policy, this implies that the policy rate that is considered neutral—where it will neither stimulate nor cool the economy because GDP is growing at its potential level, inflation is at target, and the effects of any shocks have faded—is lower than it would be otherwise.15 The lower neutral rate has important implications for monetary policy. To effectively buffer the economy in response to a harmful shock, it’s desirable that a central bank has sufficient room to lower the policy interest rate without going to zero or below, thus being forced to use unconventional tools such as large-scale asset purchases (i.e., quantitative or credit easing) or negative interest rates.16

Our next inflation-target renewal with the Government of Canada, which represents an opportunity to review our monetary policy framework, is slated for 2021.17 As part of that process, we will examine ways to meet this challenge and strengthen the framework to enhance the resilience of the Canadian economy.

Lower potential output growth also has implications for fiscal policy because it implies less tax revenue than otherwise. Less revenue could limit governments’ abilities to implement countercyclical fiscal policy when needed, particularly as demands for public expenditures rise with an aging population. This aspect is important for monetary policy, too. The credibility and success of our inflation-targeting regime depends critically on the coherence of the overall macroeconomic policy framework.18

What policies have supported potential output growth in the past and could again in the future?
To maintain solid potential output growth and rising living standards in the future, what policy lessons can be drawn from the past?

Historically, Canada has benefited from strong growth and rising living standards. Great economic opportunity has stimulated employment and investment in capital, while also encouraging investment in individuals through accessible, quality education and an inclusive social safety net. We also have benefited from robust political, legal and economic institutions, and from openness to trade, investment and immigration.

Despite those advantages, developing the appropriate policies to maintain solid potential output growth in the face of an aging population is a formidable challenge. Moreover, even the most effective policies can take some time to have a meaningful impact. That said, I’d like to touch on three policy areas that have been successful at promoting potential output growth in the past:

• education—I have benefited from the opportunity created by my own access, and my parents’ commitment, to good-quality education at all levels;
• immigration—which is something I know a bit about since my parents arrived in Canada from Europe during the 1950s; and
• trade liberalization—which I have studied and analyzed for my entire professional life.

Education

As Alfred Marshall—a founder of neoclassical economics—emphasized more than a century ago, education is critical to economic progress.19

In a period of accelerating technological change, boosting skills and the flexibility of the labour supply may be as important for potential output growth as the size of the workforce.20Improvements to education and training will help make workers more productive, which should in turn boost their employers’ overall productivity and lift the economy’s potential. In Marshall’s era, the main impediment to the quality of the labour force was illiteracy. This was a huge obstacle to lifelong learning and self-improvement. The vast majority of Canadians, of course, can read and have basic numeracy skills. But this wasn’t always the case. Our economy’s transition around the turn of the 20th century from agriculture to industry was facilitated by promoting public and private investment in education that provided broader access. The question today is whether education and training can equip a growing share of the workforce with the right skills for an increasingly technology-driven economy.

While the challenge today may seem more daunting, it also appeared insurmountable in Marshall’s time. Yet, the expected private and social returns were great, so investment followed. History needs to be repeated. New technologies should be harnessed to provide broad access to the types of education and training that will help Canadians prosper amid rapid change. This would also help to address rising income inequality, much of which is due to technological change that favours those with greater skills.21

Immigration

Higher immigration levels offer an obvious avenue for boosting potential by increasing the supply of labour, given that immigration already accounts for two-thirds of the growth in Canada’s workforce. Canada’s immigration policy has long been considered a success because of its record of attracting immigrants with the necessary skills to be absorbed into the labour force and to make important economic contributions. This approach will be particularly crucial going forward as the workforce gets older.

An important challenge, though, is whether Canada’s immigration policy can raise the levels accepted each year while continuing to be as successful as in the past at matching immigrants’ skills to the jobs that are available.22 As Governor Poloz noted recently, more could be done to speed up immigrants’ integration into the workforce, particularly given the elevated number of job vacancies in Canada.

Trade liberalization

Given demographic constraints, the most promising remedies for lifting potential may be measures that stand to increase productivity.

This speaks not only to the importance of education, as I mentioned, but also to that of creating a climate that encourages capital investment. This can be done through, for example, infrastructure spending and other efforts to ease transportation constraints.

Perhaps most helpful in this regard, though, is trade liberalization. Our experience with past and existing trade arrangements demonstrates the benefits of lowering barriers, both external and internal, including improvements in productivity that supported growth in the overall earnings of workers—a direct boost to living standards. As my Governing Council colleague Tim Lane noted in remarks last September, expanding Canadian firms’ access to overseas markets spurs them to invest, innovate and increase their productivity.23

As in other advanced economies, there is renewed focus in Canada on ensuring that we help the workers who are displaced by trade agreements. Again, education and training can help people adjust. Still, there is no question that Canada has benefited from being one of the world’s most diversified, trade-driven economies. Even as uncertainty about US trade policy currently weighs on business investment and export growth, Canada’s recent agreements with the European Union and with countries in the Pacific region, in addition to efforts at the interprovincial level, are helping reduce barriers and create opportunities for Canadian companies. 24 Our history tells us that our firm commitment to trade liberalization will remain important for supporting solid potential growth in the future.

Conclusion

Allow me to conclude with three key messages.

First, potential output is an indispensable input into the formulation of monetary policy, because the output gap is important in determining inflationary pressures in the economy. Using the output gap as our guide has helped underpin the success of the Bank of Canada’s inflation-targeting regime, which has, on average, delivered inflation roughly at the 2 per cent target on a consistent basis for more than a quarter-century.

Second, the Bank’s multifaceted approach to measuring and using potential output—drawing on diverse tools and on different sources of information—helps to manage uncertainty and ensure reasonably robust estimates. This deliberate and regularly updated approach has also contributed to our success.

Third, like other advanced economies, Canada faces important challenges to our policy frameworks and to our economic prospects from lower rates of potential output growth. Nonetheless, we have a rich history of generating economic opportunity and supporting growth, and we should draw from past successes in developing future policies.

In closing, I mentioned earlier that although potential is mostly a function of longer-term, slow-moving forces, the Great Recession had a severe and protracted impact on potential output. With the economy now operating close to potential, solid demand growth is spawning business investment, firm entry and improved labour-market conditions—all of which are helping to repair that damage.

As noted in recent policy statements, we are closely monitoring this expansion in economic capacity. It will help guide us in achieving our goal of low, stable and predictable inflation, which is the best contribution monetary policy can make to support sustainable growth and rising living standards in Canada.

Note

1. The concept of output being largely determined by aggregate demand in the short run was a critical insight of J.M. Keynes in his book The General Theory of Employment, Interest, and Money (London: Macmillan, 1936) and is incorporated in most macroeconomic models employed by central banks.
2. This identification strategy has been proposed by O. J. Blanchard and D. Quah, “The Dynamic Effects of Aggregate Demand and Supply Disturbances,” The American Economic Review 79, no. 4 (1989): 655–673. Demand shocks are neutral for GDP in the long run, while supply shocks have permanent effects on GDP in the long run.
3. See A. Agopsowicz, D. Brouillette, B. Gueye, J. McDonald-Guimond, J. Mollins and Y. Park, “Potential Output in Canada: 2018 Reassessment,” Bank of Canada Staff Analytical Note No. 2018-10 (April 2018).
4. The fact that some workers are staying in the labour force longer is also partially offsetting the impact of an aging workforce, although this effect is limited because older workers have lower employment rates than prime-age workers and usually work fewer hours per week. Another factor suppressing TLI is the rising share of workers employed in the services sector, where average hours worked tend to be fewer than in goods-producing sectors.
5. Some economists argue that the low-hanging fruit has already been picked, so productivity growth will remain tepid despite advances such as automation and artificial intelligence. Others say because such technologies are starting to be adopted more widely, large gains could be coming, and soon. See D. E. Sichel, “Two Books for the Price of One: Review Article of The Rise and Fall of American Growth by Robert J. Gordon,” International Productivity Monitor 31 (fall 2016): 57–62; B. van Ark, “Total Factor Productivity: Lessons from the Past and Directions for the Future,”  National Bank of Belgium Working Paper Research No. 271 (October 2014); B. van Ark,  “The Productivity Paradox of the New Digital Economy,” International Productivity Monitor 31 (fall 2016): 3–18; and R. J. Gordon “Comments on Daniel E. Sichel’s Review Article on The Rise and Fall of American Growth,” International Productivity Monitor 31 (fall 2016): 63–67.
6. In a similar vein, the Bank also looks to multiple gauges for measuring underlying (or “core”) inflation. See L. Schembri, “Getting to the Core of Inflation” (remarks to the Department of Economics, Western University, London, Ontario, February 9, 2017).
7. Since the late 1990s, Bank staff have used a model called the extended multivariate filter (EMVF), which filters out short-term business cycle movements to capture trends without offering an in-depth economic explanation for them. A few years ago, staff developed an additional methodology called the integrated framework (IF), which explicitly accounts for more long-term structural changes in the economy; notably, capital formation and population aging. The IF, though, is limited in that one of its key inputs is the level of the country’s capital stock, which makes its projections sensitive to short-term fluctuations in investment. To further validate our estimates, we recently adapted and employed two more models: the basic multivariate filter (BMVF), proposed by Blagrave et al. in 2015, and the multivariate state-space framework (MSSF). The latter is an enhanced version of the BMVF that is sufficiently flexible to incorporate a range of assumptions about economic relationships. See P. Blagrave, R. Garcia-Saltos, D. Laxton and F. Zhang, “A Simple Multivariate Filter for Estimating Potential Output,” International Monetary Fund Working Paper, WP/15/79 (April 2015); L. Pichette, P. St-Amant, B. Tomlin and K. Anoma, “Measuring Potential Output at the Bank of Canada: The Extended Multivariate Filter and the Integrated Framework,” Bank of Canada Staff Discussion Paper No. 2015-1 (January 2015); and L. Pichette, M. N. Robitaille, M. Salameh and P. St-Amant, “Dismiss the Gap? A Real-Time Assessment of the Usefulness of Canadian Output Gaps in Forecasting Inflation,” Bank of Canada Staff Working Paper No. 2018-10 (March 2018).
8. Capital includes measures of machinery and equipment, engineering, and structures as well as three types of “intangible” expenditures that are currently capitalized in Statistics Canada’s national accounts data: research and development, software, and mineral exploration and evaluation. Other intangible investments, such as expenditures to build databases or to increase firm-specific human capital, are not currently capitalized and included in the capital stock. For more information, see J. R. Baldwin, W. Gu and R. Macdonald, “Intangible Capital and Productivity Growth in Canada,” Statistics Canada Catalogue No. 15-206-X, No. 029 (2012).
9. Estimates of TFP should be interpreted with caution. They are not solely measures of economic or technological progress, but also include other factors such as measurement error.
10. We also do a less in-depth review for other major economies that are Canada’s biggest trading partners. As new data arrive between annual reassessments, especially for GDP and business investment, we regularly update the starting-point level of potential output and sometimes also the growth outlook for Canada. We occasionally make similar adjustments for these other economies. Any such changes are explained in the Monetary Policy Report. For more detail,  see R. Beard, A.-K. Cormier, M. Francis, K. Gribbin, J.-D. Guénette, C. Hajzler, K. Hess, J. Ketcheson, K. Mo, L. Poirier and P. Selcuk, “Assessing Global Potential Output Growth: April 2018,” Bank of Canada Staff Analytical Note No. 2018-9 (April 2018).
11. In our 2018 reassessment, we project that potential output growth will be 1.8 per cent from 2018 to 2020 before inching up to 1.9 per cent in 2021—while showing each year’s projection as the midpoint of a range. For 2018, the range is plus or minus 0.3 percentage points, while for 2021 it is plus or minus 0.6 percentage points.
12. The output gap is normally expressed as a percentage of potential output.
13. This conceptual framework for the relationship between the output gap and the deviation of inflation from target is based on the expectations-augmented Phillips Curve, originally developed 50 years ago by Milton Friedman. See M. Friedman, “The Role of Monetary Policy,” American Economic Review 58, no. 1 (March 1968): 1–17. In practice, this relationship hinges critically on inflation expectations being well-anchored at our 2 per cent target, which they are. This outcome reflects our success in using this framework since 1991 to achieve our inflation target. As a result, the target has become very credible. See L. Schembri, “Anchoring Expectations: Canada’s Approach to Price Stability” (remarks to the Manitoba Association for Business Economists, Winnipeg, Manitoba, February 15, 2018).
14. See L. Schembri “Anchoring Expectations: Canada’s Approach to Price Stability” (remarks to the Manitoba Association for Business Economists, Winnipeg, Manitoba, February 15, 2018). Also, for a discussion of demographic effects in particular, see S. Ambler and J. Kronik, “Faulty Transmissions: How Demographics Affect Monetary Policy in Canada,” C.D. Howe Institute, Commentary No. 506 (March 2018).
15. The neutral policy rate is measured as the equilibrium real interest rate plus the 2 per cent target inflation rate. The policy rate has declined because of a decrease in the equilibrium real interest rate, which has occurred as lower potential output growth has reduced the demand for investment. For further details, see R. Mendes, “The Neutral Rate of Interest in Canada,” Bank of Canada Staff Discussion Paper No. 2014-5 (September 2014).
16. During 2009 and 2010, when the policy rate was at 0.25 per cent, the Bank of Canada employed conditional forward guidance about the likely path for interest rates to provide additional monetary stimulus. Large-scale asset purchases were not conducted in Canada. However, central banks in many advanced economies did use such tools and, in the aftermath of the crisis, questions have been raised about the tools’ effectiveness, their impact on financial vulnerabilities and their possible implications for central-bank independence.
17. Such renewals are conducted every five years. The last one was in 2016.
18. For example, if a shock were to occur that required a substantial degree of monetary stimulus for a prolonged period, strong financial regulation and supervision and effective macroprudential policy would be needed to mitigate any resulting financial vulnerabilities and preserve financial stability.
19. Marshall, in his Principles of Economics (8th edition, p. 179), described education as a national investment. He wrote: “We may then conclude that the wisdom of expending public and private funds on education is not to be measured by its direct fruits alone. It will be profitable as a mere investment, to give the masses of the people much greater opportunities than they can generally avail themselves of.”
20. That said, another example of a policy that could increase potential output would be efforts to develop untapped labour supply by increasing participation in the workforce of underrepresented groups such as women, youth, Indigenous Canadians, older workers and disabled people—a point that Governor Poloz made earlier this year. See S. S. Poloz, “Today’s Labour Market and the Future of Work” (remarks to the Smith School of Business, Queen’s University, Kingston, Ontario, March 13, 2018).
21. See C. A. Wilkins, “At the Crossroads: Innovation and Inclusive Growth” (remarks to the G7 Symposium on Innovation and Inclusive Growth, Montebello, Quebec, February 8, 2018).
22. According to data from Immigration, Refugees and Citizenship Canada, the country aims to admit 320,000 immigrants this year, a number that rises to 340,000 in 2020. For comparison, in 2015 Canada admitted 272,000 immigrants. Bank staff recently conducted a hypothetical exercise to estimate the impact on potential output growth of increasing Canada’s current level of immigration 33 per cent by 2020. Holding natural population growth constant, they found that this would permanently lift the labour supply by an equivalent of about 50,000 full-time workers—providing a 0.2 per cent boost to the level of potential output.
23. See L. Schembri, “Wood, Wheat, Wheels and the Web: Historical Pivots and Future Prospects for Canadian Exports” (remarks to the Atlantic Institute for Market Studies, Halifax, Nova Scotia, November 8, 2016); and T. Lane, “How Canada’s International Trade is Changing with the Times” (remarks to the Saskatoon Regional Economic Development Authority, Saskatoon, Saskatchewan, September 18, 2017).
24. Specifically, the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) between 11 Pacific nations including Canada, and the interprovincial Canadian Free Trade Agreement (CFTA).

FULL DOCUMENT: https://www.bankofcanada.ca/wp-content/uploads/2018/05/remarks-160518.pdf

The Globe and Mail. MAY 16, 2018. ANALYSIS. Bank of Canada’s challenge on rate hikes? Assessing economy’s potential output
BARRIE MCKENNA, Columnist

Canada’s economy is running at near full tilt, unemployment is lower than it’s been in four decades and inflation is close to the Bank of Canada’s 2-per-cent target.

So why is the central bank not moving faster to raise interest rates to more normal levels?

Blame it on the Bank of Canada’s pursuit of an elusive and constantly moving economic target – potential output. Figuring out the economy’s capacity to grow using all available workers and capital − and how fast it’s growing − is central to the bank’s work. It is the magic formula that central bankers use to figure out when to stoke the economy with rate relief, cool it with rate hikes or do nothing at all.

In a speech Wednesday in Ottawa, deputy governor Lawrence Schembri acknowledged that potential output is “a somewhat abstract notion.” The best the bank can do is come up with “reasonably robust” estimates.

“The main challenge in measuring potential output is that it is hypothetical, so it is not directly observable,” he said at the city’s Rideau Club. “We can only estimate it.”

The Bank of Canada has raised its key interest three times since last June, to 1.25 per cent, with the most recent hike in January. Many economists anticipated further moves this year, but so far the bank has been on hold, in spite of generally solid economic data.

That’s partly because the central bank moved the yardsticks in its April Monetary Policy Report by significantly revising up the level and growth of the economy’s potential output. It raised it to 1.8 per cent this year from a previous estimate of 1.4 per cent, and to 1.8 per cent next year from 1.5 per cent.

“That means that, in the near term, we have a bit more room than we thought to support demand without sparking undue inflationary pressures,” Mr. Schembri explained.

Mr. Schembri added that the bank recognizes “the difficulties associated with measuring potential and the related uncertainty.” He insisted the bank takes a “deliberate and rigorous approach” to managing unknowns. That includes using multiple models to predict where it’s moving.

Among the problems facing the Bank of Canada – and most central banks in wealthy countries – is that economies are generally slowing down as their populations age. Potential output is now growing at roughly 1.8 per cent per year in Canada, down from 2.7 per cent in the three decades leading up to the 2008-09 financial crisis and recession.

Mr. Schembri said Canada is still digging itself out of the hole.

“With the economy now operating close to potential, solid demand growth is spawning business investment, firm entry and improved labour market conditions – all of which are helping repair that damage,” he said.

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LGCJ.: