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Little Carney, Flaherty can do to fix turmoil Add to ...

Hold off on any interest rate hikes, urge European leaders to put their fiscal house in order and then reassure Canadians that the economy is sound.

Beyond that, there’s little Bank of Canada governor Mark Carney or Finance Minister Jim Flaherty can do to counter the global financial panic that has pummelled Canadian stocks, the loonie and the prices of the commodities the country sells to the world.

“This is not a made-in-Canada problem,” insisted Bank of Montreal chief economist Sherry Cooper. “We are in solid financial condition domestically.”

And so Mr. Carney and Mr. Flaherty would be foolhardy to try to fix a problem that isn’t of their making, she said.

“They shouldn’t take any domestic action because it’s not about our domestic economy,” Ms. Cooper explained. “So why bother? It isn’t going to do anything.”

Besides, it isn’t the government’s job to prop up asset prices, said David Rosenberg, chief economist and strategist at Gluskin Sheff in Toronto.

“The Bank of Canada doesn’t have a magic wand for the stock market,” he added.

Mr. Carney was not available for comment Friday, but Mr. Flaherty warned that the turmoil could hit Canada and that the country is “well-positioned” to face it.

While Canadians shouldn’t downplay the risks, Mr. Flaherty said in a statement, the country has a strong fiscal position and sound banking system. The finance minister added that Ottawa has “a range of measures” to meet any potential problems in the financial sector.

“As we have always said, Canada is not an island,” Mr. Flaherty said. “We are a trading nation, with about a third of output generated by exports and deep linkages with the U.S. economy. The global economic recovery remains fragile and this uncertainty may eventually impact Canada.”

Canada is a small, open economy, and so it’s greatly affected by what happens in the rest of the world, particularly the United States.

“If I were Mr. Carney or Mr. Flaherty, the last thing I would do is start hyperventilating,” Mr. Rosenberg said.

As recently as last week, when the Canadian dollar surged to $1.06 (U.S.), it looked like Canada was becoming a safe haven for investors anxious to escape the debt woes in the United States and Europe.

But that was before Europe’s problem became the world’s problem, and before the U.S. Congress disappointed investors by punting much of the pain of deficit slashing into the future.

“Both of these factors are external to Canada,” said Paul Ferley, assistant chief economist at Royal Bank of Canada. “In that regard, there’s limited scope for Canadian officials to address these concerns.”

And yet the world’s problems quickly become Canada’s problem because the country’s economy is heavily dependent on trade and foreign investment. Exports account for roughly 30 per cent of the Canadian economy, and the U.S. and Europe buy 80 per cent of what we sell to the world.

The price of commodities, such as oil and various metals, has plunged in recent days as investors brace themselves for potentially much slower growth – and perhaps recession – in the United States and Europe.

Canada gets hit twice: once because its main customers buy less, and then a second time, because the commodities the country exports are suddenly worth less.

“The weaker U.S. performance will have a ripple effect on Canada through reduced trade and increased financial market volatility,” Scotiabank deputy chief economist Aron Gampel said in a research note.

The relatively small number of jobs created in July – 7,100 – suggests Canada is already feeling the effects. Like many economists, Mr. Gampel has lowered his forecast for U.S. economic growth this year. He now expects the U.S. economy to grow a meagre 1.8 per cent in 2011, instead of the 2.5 per cent he initially expected.

Compared to the rest of the world, the Canadian economy is in pretty good shape, having regained the jobs lost in the recession. And the country has none of the sovereign debt and severe budget problems plaguing many European countries.

Canada’s combined federal and provincial deficit equals 4.6 per cent of gross domestic product this year. That compares to 10.8 per cent in the U.S. Mr. Flaherty’s June budget set in motion a plan to eliminate the deficit entirely by 2014, although some of the details remain murky.

And that means Mr. Carney and Mr. Flaherty have room to manoeuvre if the Canadian economy stalls out. The federal government has the means to pump more fiscal stimulus into the economy, though at the cost of not balancing the budget as early as planned. And the Bank of Canada could lower its key interest rate, now set at 1 per cent.

“Mr. Carney still has a couple of bullets left in the chamber,” Mr. Rosenberg said.

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