October 3, 2017 / 4:36 PM / 15 days ago

Canada growth to surpass potential output: Bank of Canada's Leduc

FILE PHOTO: A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo

SHERBROOKE, Quebec (Reuters) - - Canada’s economic growth is expected to decline over the next few quarters but continue to exceed the rate of potential output, a top official at the Bank of Canada said on Tuesday.

In a speech about innovation and productivity that did not directly mention monetary policy, Deputy Governor Sylvain Leduc said the central bank expects an increase in entry rates of new firms and a decline in business exits over the coming quarters.

“It is also encouraging to note that the most recent data show that the rate of entry for new firms appears to have stabilized over the past few quarters,” Leduc said in prepared remarks to the Sherbrooke Chamber of Commerce.

He said the contribution of new firms to boosting productive capacity of the economy could lead to a virtuous cycle of growth.

“When the economy operates at a level higher than potential output, inflation tends to accelerate and, conversely, decelerates when the economy operates below its potential output,” Leduc said.

“An increase in productive capacity resulting from new firm creation would therefore allow the economy to grow faster without creating inflationary pressures.”

The Bank of Canada raised interest rates twice, in July and September, citing unexpectedly strong economic growth and a need to raise borrowing costs before inflation rears its head.

Financial markets are divided over whether the bank will hike rates again before the end of the year.

Leduc said that the sharp depreciation of the Canadian dollar following the 2014-2015 drop in oil prices may have contributed to the growth of “gazelles” - young firms that grow quickly. Moreover, the adjustment to the oil shock happened within the anticipated time frame, showing the economy’s flexibility.

“That said, significant challenges remain, as our productivity is still well below that observed south of the border. Productivity growth could certainly be increased by reducing the barriers that future ‘gazelles’ may face, which would further stimulate the Canadian economy,” he said.

While productivity has increased significantly since mid-2016, Leduc said it was worrying that the share of “gazelles” in the Canadian economy has declined markedly since 1997, noting that firms at the cutting edge of technology boost productivity.

Reporting by Lorcan Archer in Sherbrooke and Andrea Hopkins and Leah Schnurr in; Editing by Dan Grebler

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