Canada's financial system is strong enough to weather COVID-19 storm: Poloz
Stephen Poloz offered a hopeful assessment of the Canadian economy’s ability to rebound from the pandemic just weeks after the outgoing governor took the central bank into uncharted territory to prevent a depression.
Poloz, speaking at his last press conference before stepping down next month, said the central bank needs to be prepared for a wide range of outcomes. But he’s more optimistic than many pundits on the outlook for recovery, believing the fiscal stimulus that has been unleashed will allow Canadians to quickly pick up where they left off before the crisis.
“We have to be able to manage the risks around those things, so I’m not going to dismiss” dire scenarios, Poloz said during a media roundtable, conducted online. “But, me personally, I do think on balance what I’m hearing, the flow that I’m hearing, is a little too dire, a little bit overblown.”
After spending his seven-year term repairing the damage from the previous recession, Poloz is ending his tenure with the coronavirus shock unraveling his efforts. Canada’s economy is now in the midst of its sharpest contraction since the Great Depression with the unemployment rate at 13 per cent.
The governor has been forced to take unprecedented action just to keep credit markets from seizing up — cutting the benchmark rate to near zero, injecting more than $300 billion of cash into financial markets and undertaking the central bank’s first-ever foray into large-scale purchases of government debt.
Only a few months ago, Poloz foresaw a much calmer end to his term, saying the economy was close to “home,” with inflation near the central bank’s two per cent target and output running at full capacity. Now he’s wrapping up his term watching all those successes vanish.
Yet, Poloz likens the shock more to a temporary pause that may not trigger the types of behavioral changes typically associated with recessions and depressions, in large part due to generous income support that has been doled out by the federal government. Economists and commentators may be too preoccupied with the sharp drop in gross domestic product, he said.
“I’m relatively optimistic, what I find, compared with what the talk is,” Poloz said, adding that the economy is currently tracking the central bank’s best-case scenario of a sharp drop in output of 15 per cent. When the economy gets “turned back on” after the health crisis, “you should see a very rapid return to production.”
Poloz acknowledged there could be scarring effects on productive capacity, with some companies closing. But even here, the destruction caused by the crisis will trigger a wave of innovation and firm creation that will need to be nurtured, he said.
“You can’t be overly preoccupied with short-termism when the economy is trying to grow above trend with new company creation,” Poloz said. “We’re going to have to be patient and allow that to happen.”