The economic recovery will remain restrained until governments implement the measures they set to address global imbalances, Bank of Canada Governor Mark Carney says.
The reforms initiated by officials at the Group of 20 summit in Toronto in June were designed to narrow the mismatches in spending and saving that helped plunge the world economy into crisis two years ago. Before the imbalances are solved, an exporting nation such as Canada can't breathe easy, as evidenced by a report this week that showed the country had its biggest-ever trade deficit in July.
Governments and households in rich countries are curbing spending, but emerging market powerhouses with big trade surpluses aren't doing enough to spur the demand needed to replace that drop in output, Mr. Carney told a Calgary audience Friday. As officials from G20 countries lay the groundwork for meetings in Korea later this fall, Mr. Carney urged them to also maintain momentum on efforts to make the world financial system less vulnerable.
Steps such as requiring banks to hold more higher-quality capital, he argued, will boost confidence and lead to more flexible exchange rates by reducing "incentives for reserve accumulation.'' In the meantime, Mr. Carney said, he will "have to chart a careful course" for monetary policy, because of lingering imbalances around the world and renewed weakness in the United States that could have "important implications" for the outlook on this side of the border.
"Without the successful completion of G20 reforms, the current recovery is at risk," he said, adding at a press conference later that universal confidence in a "resilient" new international economic order is "going to require us actually implementing these reforms, as opposed to just talking about them.''
Mr. Carney praised China's pledges to let its currency appreciate and said the Asian giant has demonstrated "constructive leadership" at the G20. Moreover, Chinese imports surged more than 35 per cent in August from a year earlier, the country's customs agency said Friday, a potential sign that the currency move is having some effect.
But as a reminder that there is still a wide gulf on some of the most crucial dynamics, Chinese leaders have kept the currency's gains to less than 1 per cent against the U.S. dollar since June, when they made the commitment for more flexibility. Lawmakers on Capitol Hill plan to highlight the issue at hearings next week.
Because Canada has only a limited ability to shift the forces shaping the global rebound, Mr. Carney must tread carefully, even as he sees reason for optimism about the country's prospects. Business investment, which started to come back in the second quarter even as the recovery lost some momentum, will continue to grow, Mr. Carney said. At the same time, uncertainty about conditions around the world won't dissipate soon, he said.
Speaking two days after he raised the benchmark interest rate, for a third consecutive time, to 1 per cent - without giving a clear hint about whether he'll continue - Mr. Carney repeated a line from his decision, saying any further hikes "would need to be carefully considered" in light of "unusual uncertainty.''
By highlighting global imbalances and the threat they pose to the recovery, particularly in the U.S., Mr. Carney furthered a case for pausing at some point should events outside Canada overshadow the domestic rebound, economists said.
"The speech did clear up a little bit of the ambiguity of how important the U.S. really is," said Michael Gregory, a senior economist with BMO Nesbitt Burns. "Bottom line, it's very important - that is the key risk for the bank. But until that risk manifests itself, the bank is going to continue to raise rates, because in Canada they're too low, period.''
With files from Nathan VanderKlippe in Calgary