Bank of Canada Governor DAVID DODGE lauds the country's growing flexibility as powerful forces are rapidly reshaping the global economy -- that's what helps us manage the shocks
ON THE TRANSITION
TO FULL EMPLOYMENT
The Canadian economy is said to
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be at full employment, even though the manufacturing sector has shed a remarkable number of jobs in
the past 24 months. What has
a) surprised, b) concerned and
c) intrigued you most about this transition?
This has not been an easy period for many workers and companies. The Canadian economy is going through a very intense adjustment that is probably unprecedented in degree and speed; such changes always involve dislocation and stress.
What has intrigued me most, however, is clear evidence of the Canadian economy's growing flexibility in the face of some powerful global forces reshaping the world economy. Only when a big test comes along do we see what the economy is really made of, and it is obvious that Canada is now made of much better stuff than it was two or three decades ago.
Is this a surprise? To some extent it is, though we have seen signs over the past decade that Canadians are increasingly capable of responding nimbly to such shifts in the global economy. The Asian financial crisis that spread to other parts of the world in 1997 and 1998 deeply affected Canada -- the dollar fell sharply and interest rates climbed suddenly -- but we fared better than we did three years earlier after the Mexican peso crisis. We faced further shocks in 2000 and 2001, with the bursting of the high-tech bubble and the Sept. 11 terrorist attacks. The United States experienced a short mild recession, but Canada skated through with only one quarter in which output fell.
This time, we have seen an even bigger shock. In just over three years, there has been an enormous change in the relative prices of energy and consumer goods, and the Canadian dollar has appreciated by 30 per cent on a trade-weighted basis. But since the end of 2003, the economy has grown at an average annual rate of slightly more than 3 per cent.
ON GLOBAL FORCES
What in your mind are the most important global forces behind
this transition?
The single most important force has been the integration of China and, to an increasing degree, India into the world economy. Since China joined the World Trade Organization in 2001, its vigour and sheer size have propelled it to a leading role on the global economic stage -- a major exporter of manufactured goods with a rapidly growing appetite for energy and raw materials.
The effect on Canada of this new demand has been direct and dramatic. Prices for energy and metals have surged and prices for many manufactured consumer goods have fallen. The result has been a huge improvement in our terms of trade: The prices foreigners pay for our exports have risen, while the prices we pay for imports have fallen. Canadians' purchasing power in the world has risen because our dollar is worth more and because prices for goods from Asia's emerging economies have fallen.
This has been a boon for Canadian producers of energy and metal, including steel, which are getting far more revenue for the same volume of production, but a major challenge for some Canadian manufacturers. Their goods are more expensive in export markets because of the higher dollar, and they face increasing competition in the domestic market from lower-cost Asian imports.
ON HOW MANUFACTURING
IS FARING
How do you think the manufacturing sector is faring in this transition, given a strong currency,
expensive energy and stiff global competition? Are you surprised
that there are not greater regional
imbalances given the nature of
the current economic boom?
Some segments of the manufacturing sector are clearly feeling a lot of pain these days, in particular manufacturers of consumer goods that are facing stiff competitive pressure from imports. At the same time, manufacturers of primary metals, machinery and electronic products have been doing very well. The financial services industry has been expanding, as have sectors that provide services to business and the health services sector. Many companies have stayed competitive by making large productivity gains that will put them in a stronger position for the future.
