Canada’s economy could take 15 years to reinvent itself after manufacturing and service industries began to shrink in the wake of the financial crisis, Royal Bank of Canada CEO David McKay said.
Canada has seen a “fundamental restructuring”‘ of its export economy since losing more than 7,000 exporting companies to the U.S. when the country’s currency traded at par with the U.S. dollar following the financial crisis of 2008 and 2009, McKay, 52, said today in a television interview on Bloomberg TV Canada. Heavy manufacturing and service industries were lost, and haven’t come back, he said.
“So the economy has had to reinvent itself: create new customers and new markets with new products and new manufacturing capability,” McKay said. “That takes time. That can take a decade, that can take 15 years.”
McKay’s comments come after the Bank of Canada said Wednesday risks to the country’s inflation profile had “tilted somewhat to the downside” in the eight weeks since the central bank’s last set of forecasts. That was a departure from previous statements that described inflation risks as “roughly balanced,” and counters the bank’s long-held view that exports would lead the country out of its malaise.
Awaiting Confidence

McKay said Canadian companies are still being conservative, avoiding borrowing until they gain more confidence on the economy.
“We’re not seeing utilization of revolving credit lines, which means customers are building inventory, building receivables,” McKay said. “It feels like we’re still in a risk-off mentality with small business and commercial customers, in that they’re waiting for a more confident, clear picture of the economy.”
Canada’s economy contracted 1.6 percent in the second quarter, the most since 2009 as Alberta wildfires curbed oil production, and weak global demand and lower commodity prices prompted businesses to cut spending.
“All this volatility and economic numbers, all of this debate about whether we’re on solid footing, causes people to hold back,” McKay said. “It’s very much a confidence-driven issue.”
McKay also said he’s concerned about how much current levels of consumer debt and higher debt-servicing costs will hurt longer-term economic growth.
‘Unprecedented Territory’

“When we put so much of our consumer debt into the housing market and rates go up, more disposable income gets consumed within that consumer wallet and therefore it stunts longer-term growth,” McKay said. “That’s one of the unintended outcomes of moving so much of that borrowing forward, and putting it into housing stock the way it is. So we certainly have to be concerned about longer-term growth from that perspective.
McKay said housing policy changes in Vancouver are “unprecedented territory’ though it could stave off unaffordability issues that hit California.
For an analysis of tax changes to counter soaring Vancouver housing prices click here.
“If you look at what happened in southern California, where doctors, nurses, teachers, firefighters, policemen couldn’t afford to live in a community and had to commute from long distances, you lose your support network, you lose your economy around those houses,” McKay said. “I think they’re trying to solve that, and they have every right to solve for that kind of community challenge.”