David Dodge appeared before the Standing Senate Committee on Banking, Commerce and the Economy to testify on the state of the economy and inflation. He told the Committee that we are living in a supply-constrained world in which demand will tend to exceed the capacity of the economy to supply goods and services—and explained what this means for Canadian businesses.
The full transcript of his appearance is available here.
Below are the highlights from David's opening remarks.
A Supply-Constrained World
We are living in a supply-constrained world in which demand will tend to exceed the capacity of the economy to supply goods and services. This is true in the short run as we recover from COVID, but it is also true over the remainder of the decade.
Three Factors Keeping Pressure on Prices
There are three medium-term factors that tend to keep upward pressure on prices and interest rates and to slow real growth of output per capita:
- the aging of our Canadian population;
- decarbonization of both energy production and energy use; and
- the deglobalization of trade.
These three trend factors tend to reduce productivity and growth, push up prices and costs and result in higher interest rates.
How to Counter the Upward Pressure
These three not-very-appealing trends can be offset—and hopefully reversed—by digitalization, robotization and increased use of artificial intelligence to raise productivity here at home both in the goods sector and for our service providers as well.
But this is going to require increased investment, senators, by both governments and the private sector.
What Lies Ahead?
To tame inflation over the medium term we absolutely have to focus on increasing supply. In the short run—2022 and 2023—it is difficult to increase supply quickly . . . the only immediate option we have to get inflation down in the short run is to tamp down excess demand.
To reduce excess consumer demand, reduced government spending and increased monetary restraint is required.
Central banks need to do the heavy lifting, to do it forcefully and the quicker, the better.
Federal and provincial governments can help by being as restrained as possible in compensating households for the pain caused by inflation and as aggressive as possible in facilitating private and public investment in productivity, productivity growth and enhancing investment in capital equipment, infrastructure and human capital.