Global turmoil will slow down Canada’s recovery, the country’s top economic policy makers warn, but they don’t expect another recession and say they’re well equipped to fight a slump if they’re wrong.
At a rare summer session of the House of Commons finance committee, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney said Friday that volatility in markets and a stream of discouraging economic news point to slower-than-anticipated growth, globally and in Canada, not a new slump.
Mr. Flaherty said that while he plans to stay the course on slaying Ottawa’s budget deficit, he is also prepared to take steps to boost the economy if necessary. Later, Mr. Carney, whose next interest rate decision is on Sept. 7, reiterated a pledge to tread carefully in terms of lifting borrowing costs, and said he will act as needed to keep credit flowing.
While global developments are tempering Canada’s recovery, the comments by both men reflect their enviable room for manoeuvre compared with other major advanced economies. For Mr. Flaherty, the federal budget shortfall is far more manageable than those in other nations, allowing him to delay planned cuts or spend more if needed. For Mr. Carney, in stark contrast to his U.S. counterparts, who are handcuffed until energy-fuelled price gains cool down, there is less inflationary pressure in Canada and, having raised his benchmark rate three times since the recession, he can stay on hold for several months.
Presenting a united front and a calming message was especially important for Mr. Carney and Mr. Flaherty on Friday, because mere fears of another downturn can trigger a chain reaction in financial markets and the wider economy that ends up creating one.
Though the economy may have contracted in the second quarter and faces headwinds from abroad that are now “blowing harder,” Mr. Carney stressed growth is now picking up again, and he does not see either the United States or Europe sliding back into recession.
“Both Carney and Flaherty made the point that the global economy continues to grow, more slowly than what we’ve been expecting, but it continues to grow,” Paul Ferley, assistant chief economist at Royal Bank of Canada, said in an interview. “That’s meant to counter indications and comments that sort of imply we’re on the verge of moving into sustained declines.” Mr. Carney also painted the current shifts in demand around the world – as growth in emerging powers like China eclipses that in Canada’s main trading partners – as an opportunity, urging businesses to seek new markets and to make investments necessary to improve their productivity.
This is particularly crucial in an environment where money is poised to flow into Canada as investors around the world seek havens amid all the uncertainty, he suggested.
“He’s trying to draw people’s attention to bigger, long-term issues which should remain our focus,” Mr. Ferley said. “If in the midst of the turmoil we’re going through, if we’re seeing monies come in to the Canadian economy, let’s make sure that we direct it to those areas that offer the greatest long-term benefit.” At the same time, however, Mr. Carney renewed his warnings about high levels of household debt, arguably the biggest drawback of leaving interest rates low for so long.
Cautioning that “private credit cannot grow without limit” and noting that Canadians are now as indebted as their counterparts in the United States and Britain, he reiterated that should the so-far resilient housing market take a downward turn, consumer spending in the country could take a bigger hit than in the past because of the debt burden.
Plus, echoing Mr. Flaherty, the central banker also said it is imperative that Canada maintain its fiscal advantage over other nations, namely the United States and peripheral European countries, and stick to an “appropriately paced” deficit-reduction plan.
“In an environment of exceptionally low interest rates,” he told the committee, “we must be careful not to repeat the mistakes of others who now face challenges of simultaneously lowering unsustainable public and private debt burdens.”
