Canada is in an enviable position in this era of crippling debts and government bailouts, and Mark Carney wants to ensure that consumers and companies alike don't blow it.
The Bank of Canada Governor used a luncheon speech in Toronto on Monday to warn that Canada's recovery has been backed by "debt-fuelled" consumer spending that must be replaced by businesses using their healthy profits to boost investment and move aggressively into emerging markets.
Canada's finances are in better shape than those of the rest of the Group of Seven, he said, and capital is flowing into the country, all of which means that "there are opportunities which, in our opinion, should be taken advantage of."
While Canadian consumers have started to heed Mr. Carney's call to rein in their debts – or have hit their capacity to borrow – he reiterated his warning against yielding to temptation. This means businesses have to step up as consumers pull back, if the economy is to keep pace. And while the current climate of fear and uncertainty can make it tough to think boldly, Mr. Carney urged executives to do just that, as belt-tightening in the advanced world threatens to make traditional markets ghosts of their former selves for years.
Mr. Carney's comments came as the Organization for Economic Co-operation and Development warned that governments in industrialized nations will need to borrow even more in 2012 than they did this year. The OECD's annual outlook on sovereign borrowing calculates that they will need to raise $10.5-trillion (U.S.) next year, up from $10.4-trillion in 2011, and notes they will need to do so in a "highly unsettled" economic environment.
Canada, by comparison, has had a pretty easy go at financing deficit spending, as foreign investors flock to the perceived safety of federal and provincial securities.
Still, Mr. Carney warned that too much of that capital is being used to fund household spending, instead of building the economy's productive capacity. That has left Canada with a household debt-to-income ratio that is 13 percentage points higher than before the financial crisis, and a business sector that saw its investment in key areas such as productivity-enhancing machinery and equipment drop more sharply during the recession than in the U.S., the epicentre of the crisis.
Mr. Carney urged businesses to take advantage of Canada's stronger position while they can.
"We're a favoured destination for capital, but the question is, what are we going to do with it?" he said in a press conference after his speech to the Empire Club of Canada and the Canadian Club of Toronto. "What we really do want to avoid is having another sudden stop on investment in this country because it's 'all too difficult.' Well, it's actually not that difficult, we're not as productive, we're not as exposed to bigger markets."
It makes little sense to "wait out" the current mess in hopes that things will soon be back to normal, he said. The net worth of Americans has fallen to five times their income, from 6.5 before the financial crisis and recession, and it will take years to rebuild that lost wealth. In Europe, he said, fiscal austerity and structural changes will mean lower wages, high joblessness and tight credit conditions for businesses that prevent the region from returning to pre-crisis levels of output until around 2014.
"Uncertainty is holding back Canadian business investment, but if they are waiting for American and European deleveraging headwinds to subside, it could take five or 10 years," said Michael Gregory, a senior economist with BMO Nesbitt Burns.
Mr. Carney said in his speech that filling the economic hole that would be left by working off the household sector's net financial deficit would mean an extra three percentage points of export growth, four percentage points of government spending growth or seven percentage points of business investment growth.
Exports could languish for years as key markets deleverage, and governments are trying to get their books back in order. That makes a pickup in business investment the "only sustainable option," Mr. Carney said.
"A virtuous circle of increased investment and increased productivity would increase the debt-carrying capacity of all, through higher wages, greater profits and higher government revenues," he said. "This should be our common focus."