Former Bank of Canada governor Stephen Poloz anticipates a period of stagnant economic growth for the next year or more.

In an exclusive interview with BNN Bloomberg’s Amanda Lang set to air on Friday, Poloz said over the previous two years, Canada could have had a balanced budget and reloaded its fiscal capacity. Instead, the country has been running deficits in an economy that is over capacity, he said. 

“That was pretty bad timing, but now the economy is if not in recession at least in a stagflationary kind of scenario, probably for the next 12 to 18 months,” Poloz said. 

As a result, Poloz predicted that fiscal deficits are likely to be higher due to slowing revenues, but he said it’s important that the deficit comes from government spending on items that will pay off in the future.

“We need to look underneath and make sure if we're using a deficit in this situation, we're using it in order to make an investment that will pay dividends to the economy for a long time,” he said.

“Infrastructure, that's fine. That pays dividends forever, even childcare, that pays dividends forever. But most of the other things that we're doing, do not pay dividends forever.” 


Poloz said he also sees opportunities for a “major wave” of disinflation as companies invest in digitizing their operations and leverage AI. He said he is already seeing this trend take place. 

“I think it's actually happening, we can see companies are very actively digitizing,” he said. “On average, a company (that digitizes) saves 10 or 15 per cent in costs.”

Poloz highlighted this could have implications for Canada’s long-standing productivity issues.

“It’s not about you having a new computer on your desk, it's about reducing uncertainty for business,” he said. “They can get business done faster, we'll see our productivity pick up.”


Regarding future economic risks, Poloz highlighted that global levels of government debt are as high are “as high as it’s been since World War Two.”

“And we have growing inequality amongst workers, that is mixing with politics to give us kind of a complex and maybe dangerous cocktail of what I think is inflation risk,” he said. 

According to Poloz, this creates inflationary risks that are very different than those which have occurred recently. 

“I don't mean the kind of inflation we've lived through over the last couple of years, but a true outbreak in global inflation, a sustained one,” he said. “This has always been associated with high government debt, and it's something that I think all investors should be paying attention to.” 

More recent inflationary pressures have stemmed from the Russian invasion of Ukraine, according to Poloz. Although those inflationary pressures have “more or less washed out of the system,” Poloz said there is danger that high inflation can stick if it becomes baked into inflation expectations among regular people.

“You can't expect ordinary citizens to make all these distinctions, they just see higher prices,” Poloz said. 


Despite current and future inflationary risks, Poloz argues that the Bank of Canada should keep its two per cent inflation target, which was put in place in 1991

Since the inflation target rate was enacted, Poloz said the central bank has considered both raising it and lowering it.

“We kept settling on two per cent, because it's the place where inflation kind of becomes irrelevant to people. They don't even think about it,” he said. 

“As soon as it's around three or four per cent, they think about it a lot and they begin incorporating it into their planning whether they're a business or an individual.” 

Poloz added that the target rate doesn’t mean inflation will always stay at two per cent, and there have been periods where inflation has been above or below two per cent but later came back to target. 

However, he said the longer it stays above target the more it “becomes embedded in people’s expectations.” 


Within the broader labour market, Poloz said higher wage settlements are occurring amid increased strike activity. He said this trend is partly due to a “gigantic retirement wave” that is driving incomes higher. 

As baby boomers enter retirement, Poloz said companies are electing to promote or recruit replacement managers earlier rather than later. 

“There’s overlap. You'll note that the number of managerial jobs in the economy is growing at a double-digit pace during this transition phase,” he said. 

“That, of course, means that there are more managers and therefore managers make about double on average what regular workers do. As a result that's biasing up the wage numbers we're seeing.” 

Additionally, Poloz anticipates that workers will be in short supply for a period of about 30 years leading to higher wages, following a period of about 50 years with many baby boomers in the workforce competing for jobs.

The full Taking Stock interview with Poloz will air on Friday, Nov. 3 at 6 p.m. on BNN Bloomberg, 9 p.m. on CP24 and 10:30 p.m. on CTV News Channel