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Saturday, September 23rd, 2023

A slower recovery, not a recession

Global turmoil will slow down Canada’s recovery, the country’s top economic policy makers warn, but they don’t expect another recession and say they’re well equipped to fight a slump if they’re wrong.

At a rare summer session of the House of Commons finance committee, Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney said Friday that volatility in markets and a stream of discouraging economic news point to slower-than-anticipated growth, globally and in Canada, not a new slump.

Mr. Flaherty said that while he plans to stay the course on slaying Ottawa’s budget deficit, he is also prepared to take steps to boost the economy if necessary. Later, Mr. Carney, whose next interest rate decision is on Sept. 7, reiterated a pledge to tread carefully in terms of lifting borrowing costs, and said he will act as needed to keep credit flowing.

While global developments are tempering Canada’s recovery, the comments by both men reflect their enviable room for manoeuvre compared with other major advanced economies. For Mr. Flaherty, the federal budget shortfall is far more manageable than those in other nations, allowing him to delay planned cuts or spend more if needed. For Mr. Carney, in stark contrast to his U.S. counterparts, who are handcuffed until energy-fuelled price gains cool down, there is less inflationary pressure in Canada and, having raised his benchmark rate three times since the recession, he can stay on hold for several months.

Presenting a united front and a calming message was especially important for Mr. Carney and Mr. Flaherty on Friday, because mere fears of another downturn can trigger a chain reaction in financial markets and the wider economy that ends up creating one.

Though the economy may have contracted in the second quarter and faces headwinds from abroad that are now “blowing harder,” Mr. Carney stressed growth is now picking up again, and he does not see either the United States or Europe sliding back into recession.

“Both Carney and Flaherty made the point that the global economy continues to grow, more slowly than what we’ve been expecting, but it continues to grow,” Paul Ferley, assistant chief economist at Royal Bank of Canada, said in an interview. “That’s meant to counter indications and comments that sort of imply we’re on the verge of moving into sustained declines.” Mr. Carney also painted the current shifts in demand around the world – as growth in emerging powers like China eclipses that in Canada’s main trading partners – as an opportunity, urging businesses to seek new markets and to make investments necessary to improve their productivity.

This is particularly crucial in an environment where money is poised to flow into Canada as investors around the world seek havens amid all the uncertainty, he suggested.

“He’s trying to draw people’s attention to bigger, long-term issues which should remain our focus,” Mr. Ferley said. “If in the midst of the turmoil we’re going through, if we’re seeing monies come in to the Canadian economy, let’s make sure that we direct it to those areas that offer the greatest long-term benefit.” At the same time, however, Mr. Carney renewed his warnings about high levels of household debt, arguably the biggest drawback of leaving interest rates low for so long.

Cautioning that “private credit cannot grow without limit” and noting that Canadians are now as indebted as their counterparts in the United States and Britain, he reiterated that should the so-far resilient housing market take a downward turn, consumer spending in the country could take a bigger hit than in the past because of the debt burden.

Plus, echoing Mr. Flaherty, the central banker also said it is imperative that Canada maintain its fiscal advantage over other nations, namely the United States and peripheral European countries, and stick to an “appropriately paced” deficit-reduction plan.

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

Michael Gregory, a senior economist at BMO Nesbitt Burns Inc., said with most economists now expecting Mr. Carney to keep borrowing costs on hold until mid-2012, the Harper government may need to take another run at tightening the mortgage market after three moves since 2008, to avoid feeding the kind of “imbalances” in housing that have hobbled other economies.

“If the housing market continues to react as you would expect it to react to generational-low interest rates, they’re going to have to take a fourth kick at the ‘administrative measures’ can with respect to try and cool off housing,” Mr. Gregory said. “I could see something like raising down payments 1 per cent per year for the next five years. Nothing drastic, but something like getting Canadians back to paying 10 per cent again.” In his testimony, Mr. Carney said the bank will continue to work with the federal government to “monitor risks to financial stability and to develop appropriate responses,” which Mr. Gregory took as a hint such a move on the regulatory side of things could come sooner than later.

That’s even more plausible considering that Mr. Carney said Friday that the external risks which have kept him on the sidelines for almost a year have now “been realized,” a strong hint that rates aren’t going anywhere for a long time.

Luckily for Mr. Carney, a report Friday from Statistics Canada showed his preferred gauge of inflation slowed in July, giving him more breathing room to monitor developments outside the country’s borders. In fact, while the likeliest next move for the central bank is an increase, should the economy tank he is one of few policy makers around the world who could afford to cut rates.

The annual core rate of inflation was 1.6 per cent, while overall inflation dipped to 2.7 per cent.

“Where he’s sitting right now, they’ve got flexibility, they’ve got ammunition – conventional ammunition, and there’s not too many central banks that have that,” Mr. Gregory said. “They’re on the high ground, so I think they’re going to just stay exactly where they are and react to whatever comes up.”



“As exporters, demand levels in the various markets we serve have been impacted. We’re going to see an ongoing uncertainty. … There needs to be focused investment in Canada to enhance productivity levels to offset the currency.”

Duncan Davies, CEO, International Forest Products Ltd., Vancouver.

“My sense is we will see an increase in activity in the restructuring world …It is difficult to figure out which way things will go. In this environment it is very difficult to find solutions to existing problems.”

Robert Kofman, co-CEO of RSM Richter Inc., an accounting and consulting firm with offices in Montreal and Toronto.

“Typically in a recession, beer sales are not as affected severely. … The habit of consumers enjoying a couple of beers won’t change significantly. We’re in a good position to weather any storm that comes our way.”

Greg Taylor, co-founder of Steam Whistle Brewing, Toronto

“Our government deficit is entirely manageable. Even if [Ottawa] has a setback in revenue, it is still sustainable. … [At EIC], we won’t stop spending money because of this, but we will pick where we spend it and when.”

Michael Pyle, CEO of Exchange Income Corp. of Winnipeg, which owns manufacturing operations and several regional airlines.

“Demand for air travel is heavily contingent on the overall economic environment and people’s confidence in that economic activity. Based on what we’ve seen thus far, we agree with Mr. Carney’s comments. We are seeing a robust demand for air travel at this point. That can quickly change, but at this point we are fairly confident …”

Vito Culmoney, chief financial officer, WestJet, Calgary.

“We have a long road ahead of us across the globe and Canada is no exception … [Still], in the eyes of the world, Canada is one of the most attractive places … People want to live here, start businesses here; let’s make it easier and more welcoming for … international business, new business and immigrants.”

Peter Aceto, CEO of online bank ING Direct Canada.

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