Slower growth may be new norm as population ages: Poloz

Changing demographics and ripples from the global financial crisis are putting the brakes on economic growth, the Bank of Canada’s governor said Tuesday.

The long-term shift of an aging population means growth will be slower than historic norms, which in turn will keep interest rates lower “than we are used to,” he said.

“We continue to believe that the world economy is healing, and that Canada will benefit in the form of stronger exports” which should fuel more investment and new business creation, central bank governor Stephen Poloz said...

That should lead to a sustained growth for Canada.
However, “the demographic forces that are in play suggest that the growth trajectory that we converge on after the recovery period will be slower than our historical trend,” ...

That’s partly because an aging population tends to save more – rather than spend – to build wealth as people approach retirement. Many of those savings are going into homes, which does little to boost productivity.

Canada is already seeing the impact of a boomer generation that’s exiting the work-force, and the central bank expects that by next year, labour’s contribution to the potential growth of the economy will be half what it was in 2007. “That’s the labour story, in a nutshell, and it is slowing us down.”

In the near term, first-quarter economic growth “will be on the soft side,” Mr. Poloz said, weakness that likely stems from an unusually cold winter. Core inflation has ticked higher in recent months, though looking past the monthly volatility, consumer prices appear to be running at about 1.2 per cent.

He also said the possibility of secular stagnation – where economies perform well below normal for a long period of time with persistently weak labour markets – “needs to be taken seriously.”...

He called the improvement in productivity in Canada in the second half of last year “very promising.” Momentum is building in the United States, which will help exports and alleviate uncertainty, which in turn should help investments.

The central bank’s outlook for the next few years “is that uncertainty will continue to dissipate, boosting investment and new firm creation, and then productivity growth is expected to outpace its 30-year average,” Mr. Poloz said...

This has been excerpted from the 18 March 2014 article by the Globe and Mail and is available at http://www.theglobeandmail.com/report-on-business/economy/shifting-demographics-crisis-hangover-hitting-economy-poloz/article17540181/ (subscription may be required.)