Business investment in Canada needs to pick up before the private sector is fully able to carry the economy after months of emergency monetary and fiscal stimulus, Bank of Canada Governor Mark Carney said this weekend.
In his first comments since raising his benchmark interest rate by 25 basis points after more than a year at a record-low 0.25 per cent, Mr. Carney said recent job gains are a good sign the private sector is rebounding but cautioned that the recovery is still in its infancy. Indeed, he noted there is still a lot of “slack” in the economy and that the labour market, while turning around significantly, is by no means “tight.” “It’s still relatively early days,” he told Canadian reporters this weekend in Busan, South Korea, where he took part in a meeting of finance ministers and central bankers from the Group of 20 nations. “At our peak, we lost 400,000 jobs in the country and gained three percentage points of unemployment.”
Canadian employers added 24,700 jobs in May, Statistics Canada said Friday, and some 310,000 jobs have been created since the labour market started healing last July, meaning most of the losses from the recession have been recouped. The jobless rate stayed at 8.1 per cent, but that's because more people entered the labour market in search of work, which can be interpreted as a sign of increasing confidence in the economy. Still, 1.5 million of Canada's eligible workers remain jobless.
``It’s welcome to see participation rates are moving up at the same time as more Canadians are looking for work but I wouldn’t characterize the labour market as tight,” Mr. Carney said.
Mr. Carney also reiterated that a pickup in business investment will be needed for the ``handoff” from government spending and super-low interest rates to a private-led, sustainable recovery.
Business investment remains one of the softest spots in the economy, in stark contrast to the United States, where businesses are busily boosting capital spending. Canadian companies’ investment in plants and equipment, excluding the residential sector, was little changed in the first quarter even as the economy expand at an annualized rate of 6.1 per cent, rising just 0.2 per cent.
Meanwhile, total U.S. business investment jumped 3.1 per cent in the first quarter.
The lack of investment underscores Mr. Carney’s statement last week that there’s still ``significant excess supply” in the economy. Also, many executives are wary about the sustainability of the recovery, in light of fresh evidence last week that the U.S. turnaround may be stalled and that the European debt crisis may be widening.
Overseas trouble is helping to ``crystallize” discussions among G20 officials ahead of the leaders’ meeting in Toronto later this month, Mr. Carney said, particularly in the area of what needs to be done to make the global recovery less uneven and more lasting, such as advanced economies producing ``credible” debt-reduction plans.
``People are taking it more seriously,” he said. ``It’s easier to draw some, connect the dots between what’s going on in Europe and what could go on if it’s not handled well, and that serves as a very effective launching pad for a couple of strands of policy requirements.” Mr. Carney acknowledged the Bank of Canada is between ``opposing forces” – a rosy picture for Canada at home but a precarious one across the border and on the other side of the Atlantic Ocean – as it assesses its path to higher borrowing costs.
But he said as the economy started to heal more rapidly than expected, his decision in April to scrap a conditional pledge to keep rates on hold through midyear depending on inflation was the right one.
“We got to a point in April where it was no longer appropriate to provide, in our view, the residual amount of additional stimulus that you got from having that clarity,” he said.
