Mark Carney delivered a speech this week that was a model for a central banker: clear, precise, descriptive of the economy's recent past and current status - but also prescriptive. Whether Canadians pay heed to his analysis is another matter.
The Bank of Canada Governor offered what we might call the straight goods, without the floss and spin that accompany political speeches. His straight goods can be read with optimism or apprehension, or a bit of both, depending on how Canadians respond to the challenges he identified.
The Canadian economy got battered during what Mr. Carney called the "short, sharp recession." Industrial production fell 15 per cent, 400,000 people became unemployed and real GDP dropped 3 per cent. Nonetheless, Canada came through the recession better than other advanced industrial countries because it had a strong fiscal position, courtesy of previous budgetary surpluses and balanced budgets, and a properly financed and regulated banking system.
Recovery is now under way, but will growth eventually return to the 3-per-cent range that prevailed for most of the years before the recession? Mr. Carney didn't answer the question, but a reasonable reading of his analysis suggests that a whole lot of cards would have to fall right for 3-per-cent growth to return.
He listed four developments, for instance, that would have to occur for "securing strong, sustainable and balanced" global growth: "fiscal consolidation" in the United States and several other advanced industrial countries (Japan, Britain, Germany and France), more U.S. household savings, higher domestic demand in China and other emerging markets, and an appreciation of countries with large current account surpluses (read China).
U.S. "fiscal consolidation" is a pipe dream. The country's deficits are enormous, its debt staggering, its political system deadlocked. If a significant improvement in the U.S. balance sheet is critical for world growth, forget it. If anything, the huge amount of U.S. borrowing destabilizes the world economy and certainly weakens U.S. power in the world.
Japan's new government doesn't appear capable of getting a grip on that country's woeful deficit and debt situations. Europe's big countries are saddled with large deficits, and some of the small ones (Greece, Portugal) are listing badly.
As for China's allowing its currency to float upward, forget that, too. The Chinese are relentlessly pursuing their own self-interest on a range of issues, including not playing by the rules of international trade and monetary exchanges. By keeping its currency artificially low, China stimulates its exports, creates domestic jobs and nails everyone else. Who's going to take the Chinese to task?
A domestic challenge, arguably the most important yet most difficult of all: Canada's "abysmal" productivity. Mr. Carney was refreshingly honest in saying that "the bank does not entirely understand why productivity growth has been as slow as it has been." Modesty from a central banker? Yes, miracles do happen.
Place poor productivity next to the problems of the U.S. (Canada's largest trading partner), then throw in the aging population (the issue so few people want to talk about), and the result could be growth at 2 per cent instead of 3 per cent for the next decade. That doesn't sound like much, but Mr. Carney predicts that such a gap would lead to a cumulative loss of income of $30,000 for every Canadian.
Mr. Carney didn't go further. He could have warned that slower long-term growth would hurt government finances by diminishing future revenues, thereby weakening fiscal positions. It would force governments to cut spending seriously and/or raise taxes (unless they wanted to borrow more and more). We know these are political options that all governments (and citizens) find unpalatable.
The U.S. is burdening itself with debt, postponing days of fiscal reckoning. Huge structural changes, meanwhile, are occurring in the world economy. The challenge for Canadian business, Mr. Carney argued, is to move beyond the cocoon of the North American economy.
He put the challenge squarely: "Canadian business will need to develop new markets as the traditional advantage of relatively open access to U.S. markets becomes less valuable. To seize new opportunities, our productivity levels must improve." Again, good luck to him. The mere mention of the word "productivity" so frightens and confuses Canadians that their politicians dare not mention it.
Yesterday's news about the easing of Buy American restrictions on Canadian companies was obviously welcome. But in the great scheme of shifting world economic patterns, the changes aren't much.
At issue, instead, is whether Canadian businesses can think beyond the U.S. market. If not, Canada will be missing most of the new economic action. It's a hard challenge for a country with so many branch plants, so few head offices, so much self-satisfaction, and a long tradition of looking only south.