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Bank of Canada Governor Mark Carney speaks in Victoria on Monday. (ARNOLD LIM/The Canadian Press)
Bank of Canada Governor Mark Carney speaks in Victoria on Monday. (ARNOLD LIM/The Canadian Press)

Carney calls on private sector to step up Add to ...

Canada's economic recovery has rested almost entirely on extraordinary public policy measures, and with many of the drivers of the rebound set to disappear, it's time to start mapping out a way to hand the wheel back to the private sector, says the Governor of the Bank of Canada.

"Aggressive polices arrested the economic freefall triggered by the financial crisis," Mark Carney told a luncheon audience in Victoria Monday, citing U.S. tax breaks and sales incentives, government transfers to individuals in Japan, and broad fiscal stimulus spending in China. While the recovery is on track, he said, those temporary measures are not enough to carry it through.

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"Policy makers will have to act deftly to maintain stimulus long enough for private demand to take up the burden of growth, but not too long to undermine confidence in and the sustainability of that growth."

In a speech that largely sets the scene for his monetary policy update in October, Mr. Carney said the pace of global growth next year is likely to be higher than the bank previously projected. But he stressed the recovery will be slow and repeated his concerns about the strong Canadian dollar.The governor's comments highlight the difficulties that politicians in Ottawa and other world capitals will have in deciding when to begin curbing deficits and backing off major fiscal stimulus. If they act too soon, they risk allowing the economy to lapse back into recession, undermining confidence and leading to a further spike in unemployment. But if they cut spending too slowly, the risk is the economy may become too reliant on the crutch of government spending, leading to chronic deficits.

Canada continues to grapple with a large output gap - too much industrial capacity and not enough demand - that moderates inflationary pressures. Manufacturing capacity utilization is stuck at its lowest level in a quarter century and unemployment is at its highest level in 111/2 years, he noted.

A key problem for the factory sector is the strength of the loonie, which Mr. Carney flagged as one of the biggest risks to recovery. "All things being equal, a persistently strong Canadian dollar would reduce real growth and delay the return of inflation" to the central bank's target rate of 2 per cent.

Speaking later with reporters, the Governor would not specify what it would take for the bank to intervene in currency markets. But he noted: "We're not out of bullets, we're just not trigger-happy."

Mr. Carney also said the bank's commitment to keep rates at record-low levels until next June is not guaranteed.

"This conditional commitment does not indicate what will happen following the end of the second quarter of 2010. Nor is it a guarantee that rates will absolutely remain at the current level. In short, it is an expectation, not a promise."

Canada's economic growth is the second half of 2009 is also likely to be stronger than the bank predicted in July, but he noted that the price of that recovery - namely huge government deficits - will be a challenge for years to come.

"The fiscal cost of arresting the downfall will need to be first contained, and then repaid over many years. … Once the recovery is assured, concerted efforts will be necessary in most economies to restore fiscal sustainability."

That restraint will be most sharply felt in countries "with looming demographic pressures and unsustainable entitlement programs," he said.

Canada may be better positioned than most to take advantage of a U.S. recovery but that market shouldn't be relied on as it has in the past. "Our businesses will need to develop new markets as the traditional advantage of relatively open access to U.S. markets becomes less valuable."

Similarly, Canada's economy will rely more on emerging markets for growth, but headwinds such as subdued domestic lending in such areas mean "the external sector may not be reliable as the sole engine of the Canadian recovery."

Meanwhile, as the Bank of Canada monitors global economic forces, its policies will remain guided by its goal to "consistently achieve our inflation target, so Canadians can plan and invest with confidence."

Follow on Twitter: @justine_hunter

 

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