Global economy continues to struggle: Poloz

The new Bank of Canada Governor Stephen Poloz addressed the House of Commons Standing Committee on Finance this morning.

While he didn’t delve into the details of the bank’s functions, Poloz discussed the current global backdrop, as well as how economic factors are influencing the bank’s actions.

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Below is an excerpt from his speech:

“It is now almost six years since the start of the global financial crisis. Given the near-collapse of the global financial system and the dramatic plunge in global demand, it’s perhaps no surprise that we haven’t yet returned to normal economic conditions.

“The global economy continues to struggle. Most advanced economies are still facing credit stresses and record-low interest rates. Many central banks continue to use unconventional means to provide stimulus, and governments are doing everything they can to manage their respective debt situations.

“Clearly, the global economy is still in recovery. Global economic activity is expected to grow modestly this year before strengthening over the following two years. But this is not a recovery in the usual sense. It’s more like a postwar reconstruction. It will require sustained and focused efforts to rebuild global economic potential.”

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Following these opening comments, Poloz discussed the state of the Canada’s financial system. He says, “We tend to take notice only when things go wrong. [But] through the crisis and since, the BoC’s work has meant the resilience of Canada’s payment clearing and settlement system has been maintained at a very high level.”

He adds, “Financial stability at home is necessary, of course, but not sufficient. The crisis made it abundantly clear the global financial system needs remodeling, and the BoC has been at the forefront of global reform work.” And that’s because its made good on all G-20 commitments, he says, such as putting in place Basel III capital standards ahead of schedule.

Further, Poloz says, “In the immediate aftermath of the crisis, stimulative monetary and fiscal policies proved highly effective in supporting robust growth in domestic demand, particularly household expenditures, which grew to record levels. Yet, as effective as it has been, with domestic demand now slowing, the limits of this growth model are clear.”

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Her adds, “While the Canadian economy as a whole has recovered from the recession, thanks to domestic demand, the depth and duration of the global recession delivered a direct, sharp blow to Canadian business. In many cases, temporary plant shutdowns were not sufficient to match the fall in demand. Some firms permanently downsized their operations, [while] others simply closed their doors.”

In effect, he says a significant structural change has occurred in the Canadian economy. Poloz says, “The level of our country’s productive capacity, or its potential, dropped, as the Bank noted in April 2009. Standard macroeconomic models don’t really capture these dynamics.”

Poloz also addressed monetary policy generally, saying, “A commitment to hold inflation absolutely steady at 2% [is] unrealistic. Shocks to the economy must be taken into account. So, the framework [in Canada] is designed to keep total CPI inflation at the 2% midpoint of a target range of 1%-to-3% over the medium term…We care just as much about inflation falling below as we do about it rising above the target.”

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He gave no clear hints about how the central bank will move forward.