In back-to-back appearances, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney offered their assessments of what slowing economic growth in Europe and the United States will mean for Canada.
Here are five main points from the testimony:
“That’s exactly what we should not do,” Mr. Flaherty said as he rejected NDP calls for new spending on infrastructure and aboriginal communities to stimulate the economy now. Yet when pressed by Liberal MP Scott Brison on whether he would bring in new stimulus if the economy worsened, the minister said this: “If we were to see the situation globally deteriorate in a dramatic way, we would obviously do what is needed to protect our jobs and economy and families in Canada. We would act in a pragmatic way, as we have done successfully, previously and recently.”
What it means: It would take very bad economic news in Canada for the Harper government to move off its plans to erase the deficit by 2014-15. Should that happen, a new round of stimulus would look like the last one, meaning more generous Employment Insurance benefits and more spending on infrastructure.
“This is an opportunity for Canada’s economy,” Mr. Carney said. “The balance sheets of private sector companies are very strong. They have a lot of liquidity and there are many opportunities as we have just discussed in emerging markets and a lot of opportunities to increase our productivity.”
What it means: Many Canadian companies are flush with cash, doing well and have access to cheap credit. The Bank of Canada governor and the finance minister are urging these companies to invest more of that cash in new equipment to help the economy now and to give Canada’s private sector an advantage when global demand returns.
On consumer debt
“What this creates though is stimulus for those who need it, but it also creates the possibility of people borrowing more than they ultimately will be able to afford to repay,” Mr. Carney said. “Now the responsibility does start with the individual, it then goes to the financial institution that is lending them the money but it is important that both we point this out that interest rates will not always be at these exceptionally low levels, so think about your ability to service a mortgage, for example, over its full life when interest rates are at more normal levels.”
What it means: Interest rates will remain low for the next while until the U.S. economy rebounds. But these low rates won’t last forever and some analysts are warning Canadian house prices could soon come down. Mr. Carney is urging Canadians not to get caught with personal debt loads that will ultimately be unaffordable when the economy rebounds.
On the deficit
“We will stay the course. We will balance the budget by 2014-15,” Mr. Flaherty said. “That's the plan and we intend to stick to the plan.”
What it means: The Harper government is not using slower growth as an excuse to push back its deficit elimination plans. But slower growth will ultimately mean less revenue for Ottawa. That will create pressure on Ottawa to cut spending more deeply to make up the difference.
On the potential for recession
“The view today of the economists is very modest growth in the United States, virtually flat growth in Europe,” Mr. Flaherty said. Mr. Carney’s take: “Our expectation is that growth is going to be lower. I would not say that our base-case view has been revised so that there would not be growth in those economies, that is not the case.”
What it means: The two men aren’t predicting recessions in Europe and the United States, but they are forecasting a near miss. Economists define a recession as two quarters of negative growth. If the economic news keeps getting worse, recession talk will heat up.