(Adds comment on business investment)
By Alastair Sharp
TORONTO, April 18 (Reuters) - New technologies could help boost Canada's flagging productivity and income growth, but could also widen income inequality as some workers benefit from automation and others are hurt by it, a senior Bank of Canada official said on Tuesday.
In a speech that reiterated the central bank's concern about protectionism but did not discuss the direction of monetary policy, Senior Deputy Governor Carolyn Wilkins said free trade has given Canadian companies access to much bigger markets and greater incentives to invest.
"Trade is a great driver of productivity, and so the risk of growing protectionism concerns me," Wilkins said in a speech to the Toronto Region Board of Trade. "Disrupting supply chains and reducing incentives to compete will not create more jobs and incomes in the long run."
The Bank of Canada has long pointed to uncertainty as a big factor behind sluggish business investment, and last week said protectionism and the unknowns of U.S. economic and trade policy under U.S. President Donald Trump are the biggest risk to Canada's growth outlook.
Noting that business investment has not been strong, Wilkins said spending has been muted by uncertainty, as well as the cost of red tape and electricity.
"It's really, from our read, the combination of those costs and uncertainties outside of financing that are holding some businesses back right now and clearly the uncertainty that surrounds the trade policies of the new administration in the U.S. haven't made that any easier," Wilkins said in answer to an audience question after the speech.
Still, Canada is well-positioned to benefit from innovation, Wilkins said, but must manage the transition to avoid a hollowing out of the middle class.
"Worsening income inequality can lead to weaker macroeconomic outcomes and financial instability," Wilkins said.
She said shifts in income distribution can also alter the channels through which monetary policy actions affect the economy, since interest rates affect people differently.
Wilkins said those with higher incomes tend to be sensitive to the impact of interest rates on asset prices, while those with lower incomes are likely more sensitive to the impact of rates on incomes and debt-service costs.
Canada can create "inclusive prosperity" if it embraces new technologies while managing negative side effects like job loss. While education and training will be key to success, governments can use tools such as taxation and transfers to avoid income polarization, Wilkins said. (Reporting by Andrea Hopkins and Leah Schnurr in Ottawa; editing by Chizu Nomiyama)