Carney sees no recession

jeremy torobin AND bill curry

Ottawa— Globe and Mail Update
Published Friday, Aug. 19, 2011 10:14AM EDT

Bank of Canada Governor Mark Carney acknowledged that many of the ”downside” risks to the global economy have been realized and suggested that Canadian growth over the second half will be slower than first thought.

In testimony to the House of Commons finance committee Friday, Mr. Carney said business investment, household spending and high commodity prices should help the economy pick up after a disappointing second quarter that may have seen the economy contract. However, as growth around the world slows, he warned, demand for Canadian resources could drop and inflationary pressures are likely to be contained, he suggested.

”Relative to our prior expectations, we expect somewhat weaker economic momentum globally and, as a result, in Canada,” he said.

”Recent events serve as a reminder that in a world awash with debt, repairing the balance sheets of banks, households and countries will take years. As a consequence, the pace, pattern and variability of global economic growth is changing, and Canada must adapt.”

He also cautioned that “private credit cannot grow without limit” and noted that Canadians are now as indebted as their counterparts in the United States and Britain.

Asked by Liberal MP Scott Brison whether the chances of a recession in either the United States or Europe are higher now than when the central bank last published a forecast, on July 20, Mr. Carney said growth in both will slow, but will continue.

“Our expectation in both jurisdictions is growth is going to be lower,” he said, emphasizing the word ‘growth.’

Mr. Carney, whose next interest-rate decision is Sept. 7, said second-quarter data have ‘been consistent with minimal to slightly negative growth.” The bank had previously projected growth at an annual rate of 1.5 per cent during that period.

Echoing Finance Minister Jim Flaherty, who testified before Mr. Carney, the central banker also said it is imperative that Canada maintain its fiscal advantage over other nations, with an “appropriately paced” deficit-reduction plan.

“In an environment of exceptionally low interest rates, we must be careful not to repeat the mistakes of others who now face challenges of simultaneously lowering unsustainable public and private debt burdens.”

Mr. Carney noted that the central bank has long recognized the risk Europe’s financial troubles might pose to the global economy and said “some of that risk has been realized.”

He said Canadian officials are in close and intensive discussions with European counterparts about what further measures are still needed.

“The issue remains that this is a very delicate situation that has not yet been fully addressed,” said Mr. Carney.

Mr. Carney also said he expects Europe now faces reduced growth through 2012 and possibly into 2013.

“It will have a long tail,” he said.

However he stressed that Europe’s troubles remain with countries on the periphery of the European Union.

“The core of Europe has some very strong fundamentals,” he said.

The central banker repeated his longstanding pledge to be “prudent with respect to the possible withdrawal of any degree of monetary stimulus.”

After Mr. Carney’s last decision on July 19, many investors and economists felt he would use the September decision to prime markets for rate hikes, but the market volatility this month and economic trouble on both sides of the Atlantic have dramatically altered those expectations. It is now thought that Mr. Carney will keep his benchmark at 1 per cent well into next year.

“If the outlook for growth and inflation changes, the path for monetary policy will be affected accordingly,” he said Friday.

In the meantime, the central bank will take any steps needed to keep funding markets liquid, he said, while warning that banks should not view that protection as a “substitute for sound risk management.”

Looking back at how governments in Canada responded to the recession, Mr. Carney said government stimulus measures contributed to about a third of Canada’s economic growth.

He said government efforts to encourage growth proved “valuable.”

Going forward, he said “smart spending will continue to be important.”

BMO Capital Markets senior economist Michael Gregory noted Mr. Carney’s more dovish tone compared to his last comments in July.

As a result, further interest rate increases are expected to be pushed off for some time.

“We still judge that the next move by the Bank will be a hike, not a cut,” said Mr. Gregory in a note. “ However, the current pause could last a long, long time.”

Mr. Carney issued a warning to consumers however, stressing that while the economy currently needs interest rates to remain low, consumers should not get in over their heads with debt loads they may not be able to afford when rates inevitably rise.

“We’re not against borrowing,” he said. “But there needs to be an element of prudence in peoples’ personal affairs.”

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