Canada’s recovery will be uneven, says BoC’s Wilkins

The second-in-command at the Bank of Canada is warning that economic “scars” from the Covid-19 pandemic could become permanent without concerted effort from all Canadians.

The pandemic remains an important day-to-day concern for governments and policy-makers, but more discussion and preparation for the post-pandemic recovery needs to take place, said senior deputy governor Carolyn Wilkins, who is due to step down as of Dec. 9.

In a webcast speech to the Munk School of Global Affairs and Public Policy on Thursday, Wilkins said the economic recovery will likely be uneven and it must be recognized that some people and jobs will be left behind, despite positive outcomes such as the accelerated transition to digitization as a source of improved competitiveness.

“In our most recent projection, this adds up to a situation where Canada is likely to exit the pandemic with a lower profile for potential output,” she said.

“That means, in regular people terms, a significantly diminished ability to generate the goods and services and incomes on a sustainable basis and any of those scars could become permanent without deliberate actions from all of us.”

A report from TD Economics said the fact that Wilkins and the BoC’s governor, Tiff Macklem, have spoken on the impact of inequality on the economy “raises the prospect of a dual mandate framework in next year’s renewal decision.”

A dual mandate would mean that the BoC would have two policy objectives: stable inflation and promoting full employment. The U.S. Federal Reserve, for example, has such a mandate.

In her speech, Wilkins said, rising numbers of Covid-19 cases across Canada are concerning and present a downside risk to the bank’s forecasts, but positive news about early success in developing a vaccine helps offset those concerns.

Canadians should reject the idea that economic goals must come at the cost of social goals, Wilkins said, citing Quebec’s daycare system as an example of a policy that created a “virtuous circle” in which families were helped and more women joined the workforce.

Canada could also be made more resilient through policies that encourage equity rather than debt financing as a way to foster business creation and growth, she said.

Conventional wisdom is that the economy is a public sector problem, but private sector investment in growth-enhancing initiatives and smart incentives, such as green technology, are also important for longer term growth, Wilkins said.

“It’s not lost on me that I’m encouraging you and all of us to explore the far side of the moon when right now life still feels pretty difficult here now on earth,” she said.

“The Covid-19 pandemic remains a formidable obstacle to both our health and our economic prosperity and we can’t have one without the other. Governments are acting decisively and monetary policy is complementing these actions by creating the financial conditions that support growth.”

She said the pandemic has damaged the potential for Canada and other countries to generate sustainable economic activity, and said sights need to be set higher to help businesses create good jobs and to make high debt loads more manageable.

Canada’s productivity and competitiveness issues remain, Wilkins said, arguing that the current crisis may present an opportune time to tackle those persistent problems.

She compared the time of recovery from the pandemic to the aftermath of major wars, with both events forcing governments and businesses to adapt and innovate at speeds they previously thought impossible.

TD Economics said that other areas the BoC will be keeping a close eye on in the wake of the pandemic could include climate-change risks to the economy and the modernization of Canada’s payment systems.