Let’s review what has happened to Canada’s economy since Mark Carney left the helm of this country’s central bank to take up the more prestigious position of Governor of the Bank of England. It has only been eight months, but Canada’s reversal of fortune has been stunning.
When Mr. Carney signed off in May, the Bank of Canada was striking a mildly hawkish tone, suggesting interest rates were heading higher sooner rather than later. This was a sign of success. After masterfully piloting monetary policy through the global financial crisis, Mr. Carney and Canada became the toasts of the world. Our dollar went on a tear, we led most of our peers in economic growth and our unemployment rate fell faster than almost anyone else’s.
Since Mr. Carney’s departure, growth has slowed, unemployment has ticked upward and our currency is in a free fall. The Bank of Canada, now under Governor Stephen Poloz, has not only ruled out higher interest rates, but is even suggesting they might need to come down. Mr. Poloz calls the sliding dollar “icing on the cake” for exporters. But the downside risk is a return to the bad old days when business used the crutch of a weak currency to avoid improving productivity and innovation and, hence, mortgaged our future.
Meanwhile, across the pond, Britain is booming. The pound is on a tear. The country just posted its fastest economic growth since 2007. Unemployment has come down so quickly that Mr. Carney may need to scrap his plan, unveiled with great fanfare in August, to hold down interest rates until 2016. Mr. Carney’s rare critics say this means his so-called “forward guidance” is useless. But no one is complaining about the fact that Britain’s economic prospects have brightened considerably on his watch.
All this raises an interesting question: Is Mark Carney really that good? Do his very utterances instill the confidence bankers, investors and businesses need to get on with their jobs?
“It turns out the real way he can distinguish himself is luck,” former British Chancellor Nigel Lawson told a recent London conference. “He is a lucky man and his timing is impeccable.”
Canada could use his luck again. Mr. Poloz is eminently qualified and it would be ridiculous to suggest he is responsible for our weaker growth – though his dovish talk has surely been a factor in the dollar’s slide. No one is suggesting Mr. Carney should return to his old job. But his understanding of how the Canadian economy works is unrivalled. And his voice and vision are, for now, sadly absent from critical debates about Canada’s economic future.
All we can do is glean nuggets from his cryptic speeches as Britain’s central banker. His address last week on currency unions was especially relevant. Though it set out the terms under which an independent Scotland could use the British pound, you could have easily substituted Quebec for Scotland and the loonie for sterling.
“A durable, successful currency union requires some ceding of national sovereignty,” Mr. Carney said in Edinburgh. In other words, an independent Quebec using the Canadian dollar would have to agree to strict debt and deficit limits. This would mitigate the “moral hazard” Quebec faced knowing a much larger Canada would have to bail it out in a crisis. Europe failed to anticipate this hazard and wound up rescuing Greece and enduring a near-death experience.
Quebec separation is nowhere on the radar now, but it’s hard to believe the possibility wasn’t in the back of Mr. Carney’s mind last week. The Canadian currency union, and how to perfect it, has long been one of his favourite topics. There were ample references to it in his speech. Quebec’s public finances, meanwhile, are at the point where they can no longer remain an abstraction for the rest of Canada. Economists led by Luc Godbout and Pierre Fortin last week projected the province faces “decades of chronic deficits” without a major jolt to fiscal policy. Was Mr. Carney’s speech a preview then of one he might one day give at home?
Only Mr. Carney knows if past rumours of his political ambitions weren’t just a Liberal fantasy. But his bias toward activist government and enlightened regulation does suggest a Liberal fit. If Justin Trudeau doesn’t work out, the party could come calling again. Mr. Carney may not have Justin’s hair, but he’s got so much more of what lies beneath it.