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Central bankers take a fresh (and refreshing) approach Add to ...

These are stories Report on Business is following Friday, Dec. 14, 2012.

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A new way of thinking
There’s a fresh – and refreshing – approach to central banking in the air.

It’s one that highlights the difficulties of fighting the stagnation of the post-crisis era that has put global economies on the ropes.

And, to put it bluntly, thank goodness for central bankers who are thinking outside the box as growth stalls and unemployment remains at stubbornly elevated levels around the world.

We got our first taste of it early this week, in a speech by Bank of Canada Governor Mark Carney, who said that central banks could, in desperate times, set thresholds for inflation and unemployment, and even go so far as to target nominal gross domestic product.

Not to take him out of context, he did note how that would have to be “weighed carefully” given the “proven” system of targeting inflation.

To quote some observers, that may be radical for the Bank of England, where Mr. Carney is headed next summer.

No sooner had Mr. Carney said this than his counterparts of the Federal Reserve actually did it, setting new thresholds for the U.S. jobless and inflation rates.

The Fed has always had a dual mandate – employment and prices – but the actual target was new.

As The Globe and Mail’s Kevin Carmichael reports, the U.S. central bank is now pledging to hold its benchmark lending rate near zero until unemployment eases to 6.5 per cent and as long as the projected pace of inflation doesn’t top 2.5 per cent.

Then yesterday, former Bank of Canada governor John Crow, in a piece for the C.D. Howe Institute, argued that our central bank should stick to the status quo, targeting an annual inflation rate of between 1 per cent and 2 per cent.

“Through a record of consistent achievement over many years, the bank has established a remarkable general understanding and acceptance of its monetary policy framework – one centred on sustained low, and therefore stable, inflation as a national financial anchor,” Mr. Crow said, as The Globe and Mail’s David Parkinson reports.

Well, yes, Mr. Crow would. He’s the central banker who killed off inflation in the early 1990s, and agreed to set the price targets, but while unemployment spiked to about 12 per cent.

Unemployment in Canada is now stuck above 7 per cent, and it’s not coming down any time soon. That, by the way, while high, still pales in comparison to levels in other countries.

Which is why a new way of thinking is needed in what remains an ugly period for the global economy.

Manufacturing sales drop
Ontario’s factories took it on the chin in October as sales among Canadian manufacturers fell 1.4 per cent, even worse in real terms.

October’s decline was driven by the aerospace and auto industries and was concentrated in Ontario, where shipments slipped 3.4 per cent, Statistics Canada said today. It also revised down the previous month.

"The Canadian shipments report was plain awful given the broad-based declines and the sharp volume contraction," said senior economist Krishen Rangasamy of National Bank of Canada.

Across the country, sales fell in 12 of the 21 industries measures, accounting for more than 70 per cent of the factory sector.

Production in the aerospace industry, which can be volatile, fell more than 25 per cent, reversing a hefty gain a month earlier.

It was also the second month in a row of declines in the auto assembly sector, whose sales fell 3.7 per cent, almost mirroring September’s decline of 3.6 per cent.

Auto industry sales peaked in August, reaching their best showing since late 2007.

"While today's report was disproportionately driven by a single volatile sector, the overall weakness seen in manufacturing this year reflects the broader trends in the global economy," said Francis Fong of Toronto-Dominion Bank.

"A slowdown in emerging market growth and uncertainty related to the fiscal crises in both the U.S. and Europe have all led to a deceleration in global economic momentum, especially in the second half of this year."

China picks up
Chinese factories are getting busier ahead of the West’s holiday season, a climb in a purchasing managers’ index shows, suggesting China’s economic recovery is heading into more solid territory, Carolynne Wheeler reports from Beijing.

The HSBC Flash PMI, issued a week early to reflect the holiday season, sits at 50.9 so far in December, a 14-month high. A number of below 50 indicates contraction.

“Today’s upbeat flash manufacturing PMI from HSBC and Markit suggests that China’s recovery is continuing in the last few weeks of 2012,” said Mark Williams and Qinwei Wang of Capital Economics.

“But a high level of inventories is continuing to weigh on output and, barring some change of course by policy makers, we expect the recovery to lose some steam in early 2013.”

S&P frets over consumer debt
While everyone else is fretting over high debt levels among Canadian consumers, so too is Standard & Poor’s.

As The Globe and Mail’s Grant Robertson reports, the ratings agency downgraded Bank of Nova Scotia, National Bank of Canada and fourth others in Canada’s financial services sector late yesterday.

“Even though we haven't changed our overall assessment of economic risk, we view the overall trend as negative,” S&P said.

“In our opinion, economic risks to the Canadian banking sector remain relatively low by global comparison but the banks face incremental pressure from the headwinds facing the Canadian economy,” it added.

The acceleration of household debt to record levels has, in our view, increased Canadian households' vulnerability to sudden shocks in incomes, employment, or a spike in interest rates.”

The S&P downgrade came on the same day that Statistics Canada reported the key measure of credit market debt to disposable income among Canadian households climbed to a fresh record of 164.6 per cent in the third quarter of the year.

Loan demand in Canada, S&P said, is "approaching a cyclical peak and we expect it to moderate."

Indeed, the numbers from Statistics Canada highlighted the slowdown in credit growth.

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