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00:00I think the way we're going to set this up, this conversation, we're going to talk a little bit about some of the near-term issues for Canada's economy.
00:09Then we're going to talk more about some of the sectoral, structural issues that we have to deal with over a certain amount of time.
00:14I always told you you have a bunch of cool charts that I need to speak to.
00:18There's a bunch of cool charts. We also want to get your Blue Jays Yankee forecast as well.
00:23Okay, I'll do my best.
00:25Maybe we'll get to that at the end, yeah.
00:26So, Stefan's prepared a bunch of great charts here for us as well.
00:29We'll get to that in a little bit.
00:31But first, I want to hear about how you're thinking about the short-term issues for the economy.
00:35We have to address the elephant in the room here.
00:37I think the tariffs are quite a significant impact.
00:41Second quarter growth was hit pretty hard.
00:43Yeah, and when you compare Canada to the rest of the world, the effective tariff on our country versus the rest of the world is relatively low, at less than 5%.
00:52However, at the margin, that 5% comes on top of the suboptimal policies that were deployed over the past decade, and that's why it's hurting at this point in time.
01:03So uncertainty certainly doesn't help, Eric.
01:05But I am hopeful that our policymakers have seen the light on that one, and as Mr. Poirier says, we will move forward.
01:17Great.
01:18Before we get on to some of these more structural issues that we're facing in the economy in these great charts, let's talk about the Bank of Canada just quickly.
01:27What's your outlook for the bank right now?
01:28They're in a tough position.
01:29We have core inflation that remains quite elevated.
01:32The pressure on the economy is clear.
01:34Exports are taking a large hit.
01:35Investments not in a great spot.
01:38What's your outlook over the next year for terminal rate for the Bank of Canada?
01:41Well, the Bank of Canada is actually questioning its own core measures, Eric.
01:45Headline inflation is closer to 2% or below it, so if there's one country that still has room to cut with credibility by keeping the inflation target at 2% or less, it's Canada.
01:57So they'll be cutting rates at the next meeting, for sure.
01:59Yeah?
02:00And how low do we go in Canada?
02:03What's terminal for you?
02:04You see around 2%, 1%, 7%, 5%.
02:07You're jumping ahead of yourself because I need to see the budget on November 4th, and then we'll have that discussion after the budget.
02:13That's right.
02:14That's right.
02:15So let's move on here.
02:16We want to talk about some of these charts that Stefan's prepared for us here, so maybe if we can bring those up.
02:23Actually, Eric approved them.
02:25That's right.
02:26They got a stamp.
02:27So this is an important chart.
02:28This is one that you've prepared this.
02:31We've seen this for years, this comparison between the U.S. and Canada.
02:35I want to just talk maybe about the structural issues that we're facing here.
02:39For people in the room, the blue line is the U.S.
02:41The red line is Canada, right?
02:42So Mr. Poirier said there's a perception by investors that nothing ever happens in Canada.
02:47Can you blame them when you look at that chart?
02:50We've had no real capital GDP growth for over a decade, so clearly nothing's happened over that decade, Eric.
02:57So I couldn't blame investors that were shunning investing in our country under these circumstances.
03:03So people have said, you know, we've got great people in this country.
03:06It is true.
03:07But what really impacted us negatively over this past decade, which I call the lost decade, by the way, is your following chart.
03:15So just before we move on to this, to the next chart, we have to address that the population growth has been very high, right?
03:24So this is a major reason we have this.
03:26It's one of the reasons why there's this big divergence in terms of this trend here.
03:31It's 10% growth over the last half decade?
03:34No other country comes even close to us in terms of population growth.
03:37So we were able to attract tremendous foreign talent to Canada.
03:41So that should help us down the road.
03:44But it's not enough, because we've had this discussion before.
03:47That was just not a function only of population growth.
03:50That's right.
03:50That's right.
03:51Let's move on.
03:51We can see.
03:52Oh, there you go.
03:53We've got the flags.
03:55The flags are up.
03:57There you go.
03:58Here we go.
03:58This is productivity.
03:59So obviously we have a serious issue with that.
04:02And the Bank of Canada has flagged this as an emergency situation at the beginning of last year.
04:06It's often discussed.
04:07So I cheated on that chart because I said productivity.
04:12But it's actually real business investment.
04:14So if you attract foreign talent to your shores, make sure that you have the ability to attract business investment.
04:20So when people speak to lack of productivity in Canada, they don't realize that we've had no business investment for the past decade.
04:28So that's the primary reason why our per capita GDP has been lackluster, right?
04:33You know, as an economist, GDP is a function of capital, productivity, and labor.
04:38Labor has been great.
04:39But this is where we've gone wrong on the ability to attract private investment.
04:45You can compare that with the Americans.
04:48It's quite a divergence.
04:50So there's a couple of noteworthy points to make about the divergence here, where this trend begins.
04:58It's around 2015.
05:01Two major changes there.
05:04The liberal government was elected, as well as the oil price collapse.
05:08What do you think is the more significant trend that's driven us or kept us flat in terms of...
05:13I'm not going to make a political comment, but I just answered it.
05:19Fair enough.
05:20All right, let's get into what you're looking for in terms of what's coming up.
05:25I think this is a major moment for Canada, is this budget upcoming, Carney's first budget.
05:33So, Eric, despite the two top slides were gloomy charts, I'm the most optimistic in a decade about our economic outlook.
05:43And the biggest change came in April when Mark Carney replaced the former prime minister and made this drone speech that should be very enticing for me, as a Canadian anyway, as an economist.
05:58You know, pledging to be a G7 leading economy, an energy superpower, reform or reduce regulations, innovate, optimize the immigration policy.
06:16This is something we haven't seen in quite some time.
06:18So it's a major break from the previous decade.
06:21Now, I think we should talk about regulation as well.
06:28There's a lot of pushes, as you've suggested, in terms of reducing some of the regulations that may have in the past prevented some of the investment.
06:35You know, so Mr. Poirier was making a sales pitch on Canada saying, like, you know, we are an energy superpower, we have great people, we have a comparative advantage in many things.
06:47But you can undermine all these comparative advantage with regulations.
06:51So made in Canada, suboptimal policies.
06:55And one of the biggest, the best illustration to show you is probably the number of regulations that the federal government added over the past 15 years or so.
07:04So we now have more than 320,000 regulations impacting our corporations.
07:11So can I blame corporations for not investing under these circumstances in manufacturing alone?
07:16We should be an industrial superpower.
07:19Everybody wants to be one, but we have the ability to be one.
07:23But we've added, you know, more than 100,000 regulations to our manufacturing sector.
07:28So the reason I'm optimistic is with the Trone speech and just after the Trone speech, Mr. Carney says,
07:34I'm ordering a review of all these government regulations.
07:38You see, it doesn't have to cost you much for what the upcoming budget if you attack regulations.
07:44It's one of the neat ways where you can kickstart investment in the next few quarters.
07:50Right. So this is one of the ways that we can do this on a less expensive manner.
07:55Let's talk about some of the more expensive parts of this.
07:58Economists that we survey at Bloomberg see a deficit upcoming of at least $70 billion.
08:05That's deeper than what Trudeau's government was running.
08:09And in the near term, the PBO has suggested that the debt to GDP ratio on a net basis will rise.
08:17This is an important shift for investment, but it may also be an expensive shift.
08:22So can you maybe talk about how you're viewing the cost of this?
08:27Yeah. So don't give me the survey stuff. The real number on the deficit is $100 billion.
08:31So for people in the room, don't freak out. It's about 3% of GDP.
08:35So it's still half the size of U.S. deficit. So it's how you go about it.
08:39What do you do with that deficit?
08:40So I think $100 billion is probably the best figure to work with.
08:44Largest deficit in quite a while.
08:46But I believe that this budget that we're looking at is the most consequential budget in a generation, right?
08:54It's how you convince investors to keep with the Canadian thematic because investors own 40% of our bonds, right?
09:02So you don't want to spook them out with the budget.
09:04So this is why this budget on November 4th is so important.
09:07That's why you and I need to speak about the Bank of Canada after that because it will be a stimulative budget.
09:12But there's got to be a big investment component that encourages investors about a future outlook.
09:19Right. So comparatively, our balance sheet as a country on the federal level is in a much better spot.
09:27And at this point, if you started to use some of that to fix some of these sectoral problems you've suggested here,
09:34do you think there's appetite for that when you talk to investors, when you talk to other economists?
09:39Do you think we're shifting in terms of how we feel about, for example, balanced budgets?
09:44That was always what we were interested in.
09:47It's a great question, Eric.
09:49And to me, the important part on that is if you're going to spend, if you're going to show a deficit at $100 billion and have nothing,
09:56and introduce some measures into 2026 and not be able to grow business investment in this country, you're going to have an issue.
10:04Investors will say, you know what, it's not looking good for Canada in 2026.
10:10So this is why I say this budget is not just about showing the size deficit at $100 billion.
10:17How do you promote higher potential GDP growth in 2026?
10:22And that's been the missing link.
10:24But we need business investment to grow this potential.
10:26So I'm optimistic that Ottawa is serious about improving that outlook.
10:33So if we look at the fiscal track moving forward, if we go from a certain, if we look at, you know, where we are in terms of growth right now,
10:43we're at, you know, the rest of the year, the bank's saying like 1%, for example.
10:47If we can get those, the growth rate back up, some of the cost of this is going to be offset in the long run if we can actually increase the potential of the economy, right?
10:55It's all about, you're so right, Eric.
10:57And it's all about that because even from a Bank of Canada perspective, you don't know what your potential is at this point in time.
11:03So with the budget, you'll be able to fine tune that estimate and then that will drive monetary policy.
11:09So that's why I'm willing with conviction to give you at least one more rate cut by the Bank of Canada.
11:14But I'm not sure that they can cut in 2026 if that budget is as consequential as I think it will be because we will stimulate growth next year.
11:24Right. So your view is we're going to get another cut in October, but then we need to see, the bank's going to want to see what's in the budget,
11:30just like the rest of us in terms of how we're going to act moving forward, right?
11:34Let's talk about defense here. This is a major part of what the government's planning.
11:40Maybe talk about whether this is, you know, it's, it's, how much, how much bang for the buck do we get when we start investing in defense?
11:48Maybe talk about the multiplier of that.
11:50Well, some people, I mean, the multiplier is up for grabs.
11:52I'll tell you what the biggest multiplier, I think, where it lies.
11:56You can convince our American friends to say, like, you know what?
12:00We haven't been really serious about, you know, playing a role in NATO for the past few years.
12:05Now, by committing three to five percent of GDP, some of that will go to American suppliers.
12:10Some of that will be to Canadian suppliers.
12:13But this is how you make your pledge.
12:16And this is where the multiplier comes from, Eric.
12:18It's improved relationships with Americans.
12:22That is a multiplier that is very hard to seize at this point in time.
12:26But I do strongly believe that this commitment is a game changer with our relationship with Washington.
12:34Great.
12:35So this is just, we're going, we're getting back to, you know, comparing what's gone on in the past here.
12:41There's a lot of fear about, you know, as we mentioned, balanced budgets.
12:44This was a preference for a lot of folks.
12:47A lot of that is from what happened in the 90s.
12:49You can see from this chart, we have our interest charges relative to revenue are actually, you know, quite low relative to that period in time.
12:58You see there is this room.
12:59We have the fiscal room to do this, right?
13:02It's the, again, this is, we do have some fiscal room when you compare Canada to the rest of the world, be it on a deficit part or net debt to GDP.
13:13Mr. Poirier spoke to that.
13:15So there is some room, but we should not waste it.
13:18This has got to be in growth enhancing strategy.
13:21Again, I come back to that all important budget on November 4th.
13:25Right.
13:25So you're going to be watching closely and I think investors are going to be watching closely as to how they plan in the future our finances as well.
13:33It's not just about the outlays themselves and the size of it.
13:37It's about where we go over the next five years.
13:39Yeah.
13:39And Eric, the way to unleash growth in Canada is that we are an energy superpower.
13:43I mean, Mr. Poirier spoke to that, but we've been stranding these assets by not knowing whether or not we could exploit them down the road.
13:50And if you're going to re-industrialize and the U.S. wants to re-industrialize, I can find no better partner than Canada.
13:56We have plenty of energy and we have an energy grid that is not only cheap.
14:02Our electricity prices are 70% below the G7 average.
14:05Our price of natural gas is 80% below the G7 average, 50% of the cost in the U.S.
14:10And we have one of the cleanest electricity grid in the world.
14:13So if you are going to leverage this type of comparative advantage, I can only be more optimistic on Canada.
14:21For the first time in a decade, the federal government says, let's leverage this thing and show our American friends that we can actually re-industrialize and be part of this whole re-industrialization process that's taking part within North America.
14:33So let's say, just quickly, we're going to have to finish this up quickly.
14:39I know we could talk for, you and I could talk for 40 minutes.
14:42But let's talk about what we're seeing so far in terms of comparison of what's going on with the stock markets.
14:46Yeah.
14:47There's clearly something going on here in Canada.
14:49So I knew you were going to ask me about this, so I said, Stefan, how can you be so optimistic?
14:53Let me prove it to you.
14:55If you look at this table here, Canada is actually one of the best performing stock market year to date.
15:01So under these circumstances, if you're up more than 20 percent, clearly, I'm not the only one that's getting more optimistic on Canada.
15:07I think the markets are speaking and say, well, we're optimistic on this upcoming budget and that we will deploy the growth that we should have had over the past decade.
15:15Again, we're coming off a lost decade.
15:17Again, these policies being deployed make me a lot more optimistic.
15:21Great.
15:22So we're going to look forward to November 4th.
15:24That's going to be a big moment.
15:25We'll be talking to you then.
15:27Thanks very much for coming out to talk.
15:28So Blue Jays, Yankees?
15:32Blue Jays, definitely.
15:34Great.
15:36Thanks very much.
15:36Thanks, Eric.
15:37Thanks for having me.
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