The Current - Former Bank of Canada gov on Canada’s economic outlook

Episode Date: April 15, 2026

We speak to Stephen Poloz, the former governor of the Bank of Canada, about how the Iran war is making a shaky global economy even worse — and what options governments and ordinary Canadians have to weather the storm.

Hi, Steve Patterson here, host of The Debaters. You know, the show where Canada's top comedians go head to head on topics like, should everyone join a book club? This is kind of like our own version of Canada reads, except there's more arguing by people who've read less books. And I'm clearly not, Ali Hassan. Anyway, book some time and listen to this week's episode of The Debaters, wherever you get your podcasts. If you can pry yourself away from that book you're reading. This is a CBC podcast. Hello, I'm Matt Galloway, and this is the current podcast. Earlier in the program, we were talking about gas and diesel prices and the impact those soaring prices are having on Canadians. The price shocks from the war in Iran are just the latest to hit the global economy. Stephen Poloz served as governor of the Bank of Canada from 2013 through 2020.

He's also author of The Next Age of Uncertainty, how the world can adapt to a riskier future. He is in our Ottawa studio. Stephen Poloz, good morning. morning, Matt. The International Monetary Fund and the International Energy Agency are calling the situation in the Strait of Hormuz the biggest shock ever to hit the global energy market. What is your sense as to how bad this could get? Well, that's a pretty scary description. And, of course, we have seen major energy shocks before. But I think this one is quite critical because we've become a more fragile place in the last many years.

We shouldn't forget that we're already adjusting to a major shock coming from President Trump's revised trade architecture. That's an important adjustment that's underway in the economy through lots of countries, not just ourselves. And at the same time, we're all being impacted by a new wave, what I call the fourth industrial revolution of new technology. And when I say fourth, let's remind you that this hardly ever happens either. And so what's the worst case scenario here?

People have hinted perhaps that a recession could be on its way. What are you most concerned about? Sure. Well, of course, when a shock of this sort, the higher energy costs, is known by economists as a supply shock. It's the sort of shock that has an ambiguous effect on the outlook. What it does is it causes the economy to slow pretty well everywhere because everybody's paying more for something. It's like taxing part of your economy.

You pay more for that, which means you have less money for everything else. So you can have either a really big slowdown or perhaps a recession or you could be a country that benefits, but you'll still have a recession in part of your country and a boom in the, in the energy part, which is all fine. But at the same time, it raises prices. So it gives you this ambiguous policy environment where you really don't have good choices in policy. So the scenario that people often refer to

is gas prices are expensive. People believe that gas prices are going to be expensive for months. They see their food prices going up. They get concerned about their budget. They pull back. Maybe the vacation that they were going to go on. They cancel.

They might need a new car. They're not going to buy that new car. What would that do to the economy? Well, those are the ingredients that can give you a recession. Here in Canada, we would have all of that, exactly as you just described. But we at the same time have a big increase in revenues coming into our conventional energy sector, which is an important thing to remember. So we do have, as a major exporter, producer and exporter of conventional energy, we do have offsets in the mix. And in fact, it's possible that it would be net positive for our oil.

overall economy. But, of course, we would have, it would be like a country with our head in the oven and our feet in the freezer. It might look roughly okay at the aggregate level. But underneath, we might have what is next best thing to a household sector recession for the reasons you've just said while things are blooming in other parts of the country. And so governments are trying to figure out what to do about this. And yesterday we saw the prime minister announced that the gas tax will be suspended starting

next week for around five months. months. How much will that help, do you think? Well, it's certainly arithmetically helpful. It's going to offset some of the shock. It's a mitigate. It's going to reduce the impact. It's only really affordable if it is as characterized a temporary kind of situation. We can't permanently change the price of gasoline. We can perhaps change our tax structure so that the price of gasoline is not as high as it used to be. but that would require adjusting the tax structure so that the revenues came from somewhere else. But for this kind of thing, we all think or hope at least that this will be a few months in duration,

that that is a nice little way to deal with it. But being able to afford it is key. And there are provinces that will, and we talked about this earlier, because they have oil and gas infrastructure, perhaps will benefit from an increased price and increased production. But you have governments across the board that are post-referption. these enormous eye-watering deficits, particularly since the pandemic. Is something like that sustainable, do you think?

Well, I don't really think so. I don't want to say that we're in an unsustainable situation here in Canada. I think we're in not bad shape, and we can certainly see how we have the ingredients of turning that thing around through time. But here comes a shock that will delay that. I think what's more important in my mind is the fiscal situation in the United States, which is the world's anchor country truly is off the charts. We have a level of debt now far in excess of 100% of their economy, and their deficit is really massive given where their economy is.

So that debt is skyrocketing. It looks like the left-hand side of an Eiffel Tower at this point, and that is scary because that's the basis for the entire global system, and it's the kind of case where big accidents can happen. can happen. So as I was mentioning before, it's not about this shock, the energy shock itself. Those things come and go. It's the confluence of things, the fact that we're going to live through this fourth industrial revolution. Deats are extraordinarily high. Anyquality from between well-to-do people and those who are not, who are struggling is wide and will widen

further as an industrial revolution unfolds. This is giving rise to a confluence that we're even able to predict the outcome, which is why I call it the next stage of uncertainty. I don't want to alarm people. You said big accidents can happen in the United States. What are the big accidents? People have been worried, for example, about the economy being driven by artificial intelligence and whether that's a real inflation or not in terms of the value of those companies. But what are the big accidents that could happen in the United States economy,

which, to your point, is an anchor for the global economy? So the big accident that's for me most preoccupying is the interaction between the high level of debt, rising level of debt, and the pressure to maintain a stable financial system. So this is very similar to the ingredients that we had in the early 1970s, late 60s, early 70s, U.S. fiscal situation was getting out of control. The war in Vietnam was becoming a serious burden. And inflation was creeping up, and there was pressure. on the Fed at that time by the Nixon administration to try and keep interest rates low so that

would make it easier to finance the budget deficit. Well, you can see those ingredients have very close parallels to today. Now, you think a couple of years later, the Bretton Woods system of exchange rates exploded, the U.S. closed the gold window. We had an inflation around the world that was in double digits. That's a pretty major, macroeconomic accident. And that's the kind of, and no one planned that. It's not to say that it was all intentional. The point is that when there's all these confusing signals coming from economies,

unemployment rising at the same time as inflation is rising, what is the central bank to do? What is the government to do? There are no clear answers. And that's what I mean by accidents can happen. So when you were growing up, how would you have felt about having a famous parent? I mean, maybe your gut reaction is, oh, great, you know, get access, you get money. If you ask Dan Levy, who you might know from Schitt's Creek, he'll tell you that it wasn't what it was cracked up to be. In fact, it was a point of pain between him and his dad, the comedy legend Eugene Levy.

So Dan will tell you why he felt that way and how they worked through it. Hear that conversation now to search for Q with Tom Power wherever you get your podcasts. What is a central bank to do? Here in Canada, the Bank of Canada decided to hold interest rates steady. at its most recent decision in March. How much can interest rates move the needle when we are being buffeted by factors well beyond our border? Well, that's exactly right, not much at all.

And more importantly, I think there's a conflict, an inner conflict there, which the central bank is really tasked with making sure inflation remains reasonable, under control, so to say. and the kind of shock we're talking about, both the trade shock coming from the Trump administration and the energy shock, they both have a very similar effect on the world economy. They cause it to slow down, possibly go into recession, but at the same time raise prices. And so as a central bank, you're conflicted. Should you cut rates in order to slow down the rise in unemployment, or should you raise rates to contain inflation?

Given the lessons of the episode I just described back in the 1970s, I don't think there's much ambiguity there. Inflation's the thing that must remain contained. And so when we're in that, it's just a matter of watching to ensure or see whether those impacts on prices are going to feed through into an inflation momentum story. And that depends on where you start. If the economy is already weak, perhaps it won't. if the economy is structurally weak as opposed to cyclically weak, then maybe it will. So it's very hard to assess situation. You called the U.S. tariffs the greatest intentional destruction of income ever.

How bad has the damage been from what Donald Trump announced just over a year ago? Yes, it's beginning to really show up, Matt. The thing is that what is happening is other things can mask that effect. So people might look and say, oh, the U.S. economy is doing okay. So I guess it hasn't really been impacted. Canada is doing okay. So I guess the impact hasn't been so big. But when there are offsets, then you say, well, maybe it's bigger than you think because

it's beneath the surface. And so in the first Trump administration, we know that what happened was household costs rose by almost $900 per year because of the tariffs on steel and household appliances, that sort of thing. We're in the midst of another thing happening just like that now. And so the U.S. economy looks okay because there's lots of investment in new data centers. It's adding like two percentage points to GDP that's keeping the economy up there. There's lots of fiscal expansion, as I mentioned before, like five or six percent of GDP going out there.

Big checks are probably coming this tax season to people as Trump brings in the money from tariffs and delivers it to people. With a midterm election coming up? Well, exactly. So if you didn't have those two things, the fiscal shock and the investment boom coming from AI, the economy might look like it's zero, let's say. Let's say it's around zero.

Well, people then would be talking about some of this is because of the tariffs. So underneath the surface, that is actually happening. And people's purchasing power is being squeezed permanently by this, And what that means is that we'll have a lower rate of growth from now on in addition. And so you have a lower output in the economy, and we're guessing as economists, let's be honest about that. The models kind of give us these inferences. Around two percentage points of the global economy decline as a result of this new trade architecture.

And maybe half a point per year less growth from then on. Well, Matt, that doesn't sound like a lot. Sounds like little numbers that you wouldn't argue about. But at the global level, we're talking about something like $40 trillion worth of output lost forever over the next 10 years. Forever. So we're all poor because of this? That's absolutely right. Forever.

Forever. Because I was going to, I mean, I'm tired of a roller coaster in some ways. And it feels like a lot of people are. The last few years have been tumultuous. And the belief is maybe at some point of time we'll get back to some sort of stability, some sort of normalcy. But you're suggesting that's not likely to happen. No, that's exactly the point of my book, Matt, is that we are in an era where there are these natural, almost Mother Nature delivered forces hitting us. And there's nothing that we can do about those, like earthquakes.

So we're adding more to them. But a fundamental one is the fourth industrial revolution. We had the steam engine. We had electricity. We had computer chips. And now we have the digitalization of everything we do with AI as the interface between us and that digital economy. And that revolution is going to cause even more income inequality, more political stresses, polarization, more of these kinds of off-the-charts policies or geopolitical adventurism.

and short, more volatility. And as economists, when these things happen all at once, with interacting with those high debt levels we already talked about, we don't have a way to predict how it will come out. And therefore, it just emerges as volatility or even chaos. And we have past episodes. We need to learn from them. You know, Great Depression in the Victorian era,

the Great Depression in the 30s, the global financial crisis. Right. These all have these fundamental roots. We're out of time, but can I ask you just very quickly two things. And it's just about advice for people based on what you know. We talked about the cost of everything going up. There's a survey coming out suggesting that something like 40% of Canadians worry about job loss in their own family. They're worried about paying for things and keeping the lights on.

What advice would you have for those people who are worried that somebody in their family is going to lose their job? Well, you need to invest in your own resilience. that would be while, you know, using some time each week to learn some new things so that you present yourself as an adaptable, flexible, I can learn new things person on the job because companies will still need people. They're going to need people that are different than you, perhaps. And so you can increase your reemployability or your adaptability within your firm just by demonstrating those learning abilities, being able to learn on the job, invest in. more options for your future and build financial buffers. Don't buy the biggest house that the bank will allow you to buy. Back it off by 10 or 15%.

So there's a cash buffer in behind you and you're prepared for those kinds of events that can really throw off your schedule. What about just briefly for young people? They are entering a very uncertain job market. They're worried that AI is going to take their job away. Something like 53% of the job losses in the first three months of this year were young people. What advice do you have for them? Well, similar to what I just said, investing in your optionality or your ability, I always say to kids, when you go to a restaurant and there's only four things on the menu, that's kind of a drag, but unless it's perfect for you.

What you want is a restaurant with 40 things on the menu. Think of how you can prepare yourself for that bigger menu. Study everything. Study everything. Be a generalist who's interested in everything. And try to remember one thing, which is a source of optimist. And that is, we've done this before. We've been through three industrial revolutions,

and there's been more jobs created than were destroyed every single time. The people who invented the iPad made a lot of money, and they did not spend all that money on new iPads. They spent the money on everything else in the economy. And that's why you can't get someone to renovate your house or to service your furnace. People like this are critical, and we are in short supply in many sectors of the economy that we forget.

Stephen Polos, really good to talk to you about this. Unsettling, but this is important. Thank you. Always a pleasure. Thanks, Matt. Stephen Polos, served as the governor of the Bank of Canada from 2013 through 2020. He's the author of the new, pardon me, the next age of uncertainty, how the world can adapt to a riskier future. You've been listening to the current podcast. My name is Matt Galloway.

Thanks for listening. I'll talk to you soon. For more CBC podcasts, go to cbc.ca.ca slash podcasts.