Prime Minister Stephen Harper and Finance Minister Jim Flaherty with Stephen Poloz, governor of the Bank of Canada, during a photo opportunity in Ottawa on June 3, 2013. THE CANADIAN PRESS/Sean Kilpatrick

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On Wednesday, the Bank of Canada issued its regular monetary policy report. To no one’s surprise, the Bank maintained its overnight rate at one per cent.

But the real news wasn’t the bank rate, which hasn’t changed since September 2010. The real message is that Bank of Canada governor Stephen Poloz is very concerned about the prospects for the Canadian economy. There simply is not enough aggregate demand in the economy — and the picture doesn’t look good.

Inflation is moving further below the official target of two per cent and he attributes this “to excess supply in the economy and heightened competition in the retail sector”. But even Mr. Poloz isn’t sure what’s really happening. He candidly admits the Bank has an “incomplete understanding of the inflation picture.”

The governor is expecting growth to pick up to 2.5 per cent in 2014 and 2015 — but he doesn’t sound very confident about his own forecast. On one hand, he acknowledges that the “the U.S. recovery is becoming more broad-based” — on the other, “the wedge between the level of Canadian exports and that of foreign demand remains difficult to explain.” Despite recovery in the U.S, he said, “there have been few signs of the anticipated rebalancing towards exports and business investment in Canada.”

These forecast growth rates are roughly in line with the rates in Finance Minister Jim Flaherty’s fall fiscal update. And they sound great — but as Mr. Poloz says, these higher rates of growth still imply “that the economy will (only) return gradually to capacity over the next two years or so” — seven years after the recovery started, in other words. The U.S. economy, which suffered a more severe recession, will get back to full utilization of resources before Canada.

Reading between the lines suggests that the Bank does not expect a strengthening in employment growth and any significant reduction in the unemployment rate before the 2015 election.

We are definitely not the best in the G-7.

Reading between the lines suggests that the Bank does not expect a strengthening in employment growth and any significant reduction in the unemployment rate over the next eighteen months — before the 2015 election, in other words. And there is very little the Bank can do about it, short of lowering the overnight rate further.

The simple fact is that there is a need for more aggregate demand in the economy. This has been the case for the past three years. Since 2010, growth in output and jobs has been falling and in 2013 only 102,000 net jobs were created; 60,000 full-time jobs were lost in December alone. Unused capacity in the Canadian economy has been growing for the past four years.

The response from both the Bank and the federal government to this shortage in aggregate demand has been to try and engineer a lower dollar to help exports, particularly exports of manufactured exports. Exchange markets are very unpredictable in how they react to such attempts at manipulation. Based on our experience in the 1990s, the best advice we have for Mr. Poloz and Mr. Flaherty is this: Be careful for what you wish for. In the end it’s always the exchange market that wins. You may get a lower dollar — but you have no idea, no control.

Mr. Flaherty is simply not prepared to do what is necessary to raise aggregate demand in the economy. For years, the government’s strategy has been to cut the deficit it created and hope that exports and investment would fill in the gap. This hasn’t worked.

Despite this, Mr. Flaherty’s still believes the answer to insufficient aggregate demand is to eliminate the deficit by 2015-16. Even the International Monetary Fund thinks he’s wrong. It has recommended that, in the absence of a strong recovery in growth and job creation, the date of deficit elimination could be delayed.

Answer the phone, Mr. Flaherty. Mr. Poloz is calling, and he’d probably like more than a bare-bones budget to deal with excess supply, high unemployment and low inflation.

Scott Clark is president of C.S. Clark Consulting. Together with Peter DeVries he writes the public policy blog 3DPolicy. Prior to that he held a number of senior positions in the Canadian government dealing with both domestic and international policy issues, including deputy minister of finance and senior adviser to the prime minister. He has an honours BA in economics and mathematics from Queen’s University and a PhD in economics from the University of California at Berkeley.

Peter DeVries is a consultant in fiscal policy and public management issues, primarily on an international basis. From 1984 to 2005, he held a number of senior positions in the Department of Finance, including director of the Fiscal Policy Division, responsible for overall preparation of the federal budget. Mr. DeVries holds an MA in economics from McMaster University.

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