Business

Some ‘tough’ times ahead

But the world is not falling apart, says Canada’s new central banker

March 5 2001
Business

Some ‘tough’ times ahead

But the world is not falling apart, says Canada’s new central banker

March 5 2001

Some ‘tough’ times ahead

Business

But the world is not falling apart, says Canada’s new central banker

New Bank of Canada governor David Dodge is the first outsider to lead the central bank. At the end of his third week in the job, Dodge, 57, talked with National Public Policy Correspondent Mary Janigan in Ottawa. Excerpts:

Maclean's: How is Canada’s economy?

Dodge: Most of the conditions which normally tip you into a recession are not there. Credit markets are functioning well. Incomes are higher. Federal and provincial tax cuts are working their way through the economy. What we would expect is that the first quarter or maybe the first two quarters will show a pretty sharp adjustment process. But we would be through it by the summer and back on a reasonable growth trajectory. There is going to be, especially in some parts of the country, six months or so of tough adjustment. But this is not going to be something widespread and prolonged, where all of a sudden the world is falling apart.

Macleans: Why has it happened so fasti Dodge: This is the new element in 2001 that wasn’t there in 1991. In a just-in-time world, the impact of slowing sales gets translated into factory production much faster than it did even 10 years ago. What we think that means is that normal adjustments will take place more sharply—but we will get through that adjustment more rapidly as well. Flow people react is less knowable. The risk is Canadian consumers and businesses will get caught up in this negative psychology. Macleans: How do you see the U.S. economyi Dodge: They did get more stresses and strains. But the real danger is that the American consumer will get spooked—and U.S. consumption has been a major drive for the world. What one has to hope is that the actions of the U.S. Federal Reserve and hopefully words of the U.S. administration will not create an atmosphere where everybody gets worried— because objectively there are not the worrisome conditions. Macleans: What about Nortel’s steep divei Dodge: What has happened is that, all of a sudden, the telecoms adjusted down what they had to invest—so planned purchases got deferred. That’s a very small segment of the economy—but it’s a marquee sector. So it’s understandable that people say, ‘Holy smokes, if Nortel, one of our leading corporations, is having trouble, everything else is in trouble.’ That is absolutely not the case. More generally worrisome is

the automobile sector where the Big Three North American firms have very sizable inventories and where higher gasoline prices cast some doubt on the sale of trucks and SUVs. Maclean’s: Why is it important that people understand the bank’s inflation policyi

Dodge: With inflation targeting, you can pretty much tell the direction in which we are going. That’s very new. That wasn’t true in the 1970s or 1980s. People made all sorts of mistakes: borrowing too much money, making investments at the top of the cycle. Had you anticipated in 1987, as inflation moved up, that the bank was going to really tighten up, you wouldn’t have done some things which got you into real trouble. And we wouldn’t have had to have gone through the wrenching downturn we went through.

Macleans: Should you increase the current inflation target of one to three per cent when it expires at the end of this yeari Should you extend its three-year cyclei Dodge: We have all been operating now for six years on the basis that inflation will be two per cent or a little less. If all of a sudden I tell you it’s going to be three per cent, you would say, “The grounding is gone.” Our track has worked well— and there are very good reasons to stay roughly on it. It might be a good time to run an agreement over a longer period, to provide more certainty. There are some technical issues— especially if we are extending it for a five-year period. Macleans: Could we be through the downturn before any rate changes you might make on March 6 have an impacti Dodge: That is precisely the issue. If we were seeing real problems in credit markets, we would know we have got a lot of tightness. But we don’t see the sorts of problems that would cause us to be desperate about taking an action. Our view is we will be on a more sustainable path in 12 or 18 months. So it’s a very, very tricky judgment call for us. El