In a speech to the Saint John Board of Trade, Bank of Canada Governor Mark Carney said that although the risk of another U.S. recession has risen, he expects the Canadian economy to grow through the rest of the year and stands ready to use a variety of tools and policy options to ensure stability.
As to recent events affecting the strength of Canada’s recovery, Carney remarked that the U.S. slowdown is more significant to our country than Europe’s ongoing troubles.
“The Bank of Canada does not expect a recession in the United States, although the risk has clearly risen,” Carney said. “The U.S. economy is close to stall speed, where a negative feedback loop between weak employment, consumer demand, and business hiring and investment could emerge. The possibility that markets themselves could tip the balance cannot be dismissed.”
In regards to the European debt crisis, Carney said it is “fixable” but urged a comprehensive recapitalization of European banks and a funding stop for sovereign debt. In the short term, the problems in Europe are being compounded by slowing global growth. In particular, the U.S. economy has lost momentum. He pointed out that recent benchmarks show that the U.S. recession was deeper and its recovery has been shallower than previously reported. The U.S. housing market remains a mess, the consumer is weak, and government actions can be expected to reduce growth after materially boosting it in recent years.
American households have experienced a major shock to their net worth. These losses can only be recovered through a combination of increased savings and rising prices for houses and financial assets. Each will clearly take time. Overall, the U.S. is in the midst of the weakest recovery since the Great Depression, and the Bank of Canada does not expect that to change any time soon. The Bank expects the U.S. economy to continue to grow at or below two per cent until the second quarter of 2012.
Canada’s net exports are now expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges, in particular the persistent strength of the Canadian dollar. Reduced competitiveness typically means a higher penetration of imports into Canada. Indeed, the ratio of imports to GDP has risen seven percentage points over the past decade in Canada. However, some good news is that, over the same period, an increasing proportion of Canada’s imports are for investment purposes, rather than consumption.
The Bank of Canada expects that growth will resume in the second half of the year, led by business investment and household expenditures, although lower wealth and incomes will likely moderate the pace of investment and consumption growth. In July, the Bank projected growth of 2.8 per cent for 2011 and 2.6 per cent next year. The Bank also expects total CPI inflation to continue to moderate as temporary factors, such as significantly higher food and energy prices, unwind. Core inflation is expected to remain well contained.
In the face of the difficult external environment, the Bank of Canada will continue to support Canada’s economic expansion by keeping inflation low, stable and predictable.
In his speech, Carney also pointed out three major forces that are affecting the long-term outlook for Canadian businesses and economy. The first is that Canadian firms are underexposed to the fastest growing parts of the global economy. Second, that commodity prices can be expected to remain elevated relative to historical averages and third, that Canadian firms are not as productive as they could or need to be.
The world’s economic centre of gravity is shifting from advanced to emerging economies. The U.S. economy can be expected to be relatively weak for some time as households repair balance sheets and governments wrestle with deficits. Canada will have to look elsewhere to grow its exports Carney said. Emerging Asia is rapidly urbanizing. China and India are housing the equivalent of the entire population of Canada every 18 months. Thus, even though commodity prices have eased in recent weeks, they can be expected to remain at elevated levels, supported by large, sustained demand increases form the emerging world, particularly Asia.
Carney stressed that Canada will need to take advantage of such opportunities because the limits of domestic debt and demography mean that the potential growth of our economy is slowing. As the boomer generation ages, labour force participation rates will decline and hours worked will fall. The direction is clear. The question is merely one of degree.