Bank of Canada Governor Mark Carney, who in August touched a nerve by suggesting Canada’s companies were sitting on a pile of “dead money,” now says that cash pile is poised to come back to life.
Mr. Carney was prompted to revisit his controversial comments during a public interview hosted by Thomson Reuters in Washington on Thursday. Canada’s central bank chief said a lot has changed since he provoked the ire of some executives for suggesting they were mismanaging their companies.
“The thing we were concerned about in Canada was there was some latent concern that we need to preposition money for potential investments, or potential eventualities…without taking into account the resilience of the Canadian financial system,” Mr. Carney said. “What we have seen since is that concern, the concern about access to credit, has come down very sharply in Canada…Now, the corporate dynamics are much more centred around fundamentals.”
Later, Mr. Carney added that this capital is “dead no longer. Resurrected.”
Mr. Carney’s confidence is rooted in the Bank of Canada’s latest economic analysis, released Wednesday in Ottawa.
Policy makers surprised some Bay Street economists with a prediction that Canada’s economy will expand at an annual rate of about 2.5 per cent over the second half the year, much faster than first-half growth that likely will average less than 2 per cent.
The central bank is betting on a revival of exports and business spending. That prediction isn’t based on current indicators. Canada has recorded a trade deficit for the better part of a year, and business surveys show companies expect to spend less on investment this year.
Mr. Carney and the Bank of Canada thinks conditions are about to change. Their latest Monetary Policy Report says trade should be a net contributor to growth this year and next – a shift from 2012, when trade detracted from economic growth because Canada imported considerably more than it exported.
Business fixed investment will contribute 0.4 percentage points to growth in 2013, somewhat less than last year, and climb to a contribution of 0.8 percentage points in 2014.
The reason: U.S. households and businesses.
Mr. Carney acknowledged Wednesday that on the surface, the U.S. economic recovery appears to be flagging. Much of that is the result of government budget cutting. But, for Canada, more important is the state of private U.S. demand, which Mr. Carney said has “sustainable momentum.”
Households have replenished wealth lost in the recession, and the housing market is getting stronger. The Bank of Canada said in its policy report that it expects U.S residential investment will increase at an annual rate of 12.5 per cent between 2013 and 2015. If historical relationships hold, that should boost Canadian export growth by an average of roughly 1 percentage point a year.
The central bank assumes stronger export demand should inspire companies to expand to take advantage. Meantime, at home, the growth of household debt has slowed to a rate that is in line with increases in incomes, meaning there’s less risk of a wave of defaults. Surveys suggest banks are more willing to lend.
And of course there’s all that cash – some $300-billion sitting on Canadian corporate balance sheets. Mr. Carney noted that when he first talked of “dead money,” the European debt crisis was unresolved and U.S. lawmakers appeared ready to go over the “fiscal cliff.” Since then, the European Central Bank has pledged to backstop any country that gets into trouble, and the U.S. avoided the “cliff,” if inelegantly.
“All of that, we think, is going to kick in to having some of that money put to work,” Mr. Carney said.