Canada to lead G7 growth in next two years, but global recovery troubled: Carney |
Date: Thursday, June 17, 2010
Author: Investment Executive
Canada’s strong recovery is increasingly being put at
risk from mounting debt problems confronting most of the industrialized
world, Bank of Canada governor Mark Carney warns.
In a speech and
news conference in Charlottetown on Wednesday, Carney lauded Canada’s
domestic economy, which he said would lead the Group of Seven big,
industrialized nations in the next two years.
But the growing
debt burdens in many advanced countries -- and the need for governments
to embrace a new “age of austerity” in spending -- could restrain growth
by wiping out $7 trillion from the global economy, absent
countervailing measures.
“(The Canadian) outlook is subject to
considerable uncertainties,” he said. “Recent tensions in Europe are
likely to result in higher borrowing costs and more rapid tightening of
fiscal policy in advanced economies. Without countervailing policies,
this could lead to a more protracted recovery.”
The immediate
impact on Canada, added Carney, is that even he is uncertain how to
proceed with interest rates in the upcoming months.
After
breaking new ground by hiking rates a quarter point two weeks ago, he
cautioned that markets should not assume future increases are
“pre-ordained.”
“Given the ongoing uncertainty surrounding the
outlook, any further reduction of monetary stimulus would have to be
weighed carefully against domestic and global developments,” he said.
Economists
reacted with a shrug to the new advisory on rates, saying the central
bank had broken little new ground. Analysts who thought the bank was on
track for another quarter-point hike on July 20 before the speech
remained in that camp afterwards.
“Mr. Carney provided no further
clarity,” said Michael Gregory of the Bank of Montreal. “We still judge
that they will hike rates 25 basis points given domestic demand
momentum.”
Markets also saw the speech as a saw-off. The Canadian
dollar rose slightly, then retreated, ending the day about where it
began at 97.52 cents US.
In a news conference after his address,
Carney stressed that the biggest risks facing Canada “are from abroad.”
The
domestic economy has been bouncing back from recession robustly with a
6.1% advance in the first quarter of 2009, although the pace of growth
will moderate.
Household spending, which has sustained the
recovery, will slow to the pace of income growth. There was evidence the
forecast is already becoming a reality with a report Wednesday that
seasonally adjusted house sales fell 9.5% in May.
But Carney says
Canada’s fundamentals remain strong -- low government debt, sound
banks, and healthy corporate and household finances.
While this
will stand the country in good stead in withstanding the challenges
ahead, he made clear Canada is not an island and that repairing the
damage from the recent recession will be difficult and take time.
“This
was the Great Recession,” he said. “To claim otherwise with simplistic
comparisons to prior downturns is to ignore both the rapidity and scale
of the policy response, as well as the likelihood that the aftershocks
from the crisis will persist for years.”
The aftermath includes a
world awash in sovereign debt, he said, calling Greece the canary in
the coal mine of what other countries may soon face.
But the
problem, while large, is not beyond remedy.
“It’s not
intractable. It’s addressable, but it will take bold action,” he said.
With
world leaders meeting in two weeks in Toronto at the G20, Carney said
governments must address the gaping holes in the financial system, such
as ensuring banks have sufficient capital reserves and are discouraged
from foolish risk taking.
Governments must also put in place
plans to get out of debt and address fiscal imbalances by making sure
countries such as the U.S. export more, and China imports more.
Carney
also said Canadian corporations must be bold in meeting the challenges
of the new economy where two-thirds of growth now resides in emerging
economies, not established ones like the U.S.
Returning to a
theme he has voiced in the past, Carney hectored corporate leaders for
not investing enough in new equipment to increase their productivity and
for not looking beyond the U.S. for new markets.
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