Mark Carney sees risks but no new slump

Bank of Canada Governor Mark Carney acknowledged Tuesday that the risk of another U.S. recession has risen and outlined a daunting prescription for European policy makers to stabilize the region's banks and economies, but urged Canadians to forge ahead with steps needed to make the domestic economy more resilient.

Speaking to a business audience in New Brunswick, Mr. Carney reiterated much of what he and his policy team said two weeks ago, when they left their benchmark interest rate unchanged at 1 per cent and indicated they saw less need to tighten borrowing conditions any time soon.

Still, while saying that the risks to Canada mostly come from outside its borders, Mr. Carney stressed that Canadian businesses should not behave as if they have little control over their destiny, even as the country's biggest trading partners promise to be stuck in the mud indefinitely.

Calling the combination of ``high debt loads and unpredictable politics" in the United States and Europe toxic, Mr. Carney added it is ``important to distinguish between the willingness to act and the ability to address the current challenges."

And whether such action comes or not, Mr. Carney said Canadian companies must increase their links with faster-growing emerging markets – in part to take advantage of high commodity prices while other exports languish – and do whatever they can to make themselves more productive as the population ages and the work force shrinks.

``Regardless of what happens in the United States or Europe, these challenges and opportunities need to be seized through sustained efforts here in Canada," Mr. Carney said in the text of a speech he's scheduled to deliver to the Saint John Board of Trade. ``The underlying currents – those forces that affect the long-term outlook for our businesses and economy – are much stronger.''

Nonetheless, Mr. Carney's speech – his first in Canada in about three months – comes as financial markets are gripped with fear that a failure to spur growth in the U.S. and Europe's difficulties in containing its debt crisis could ultimately cause another global downturn, and one which policy makers have less scope to fight.

The International Monetary Fund on Tuesday was the latest forecaster to predict slower growth for Canada as its key markets suffer, calling for 2.1 per cent growth in 2011 and 1.9 per cent next year – much weaker than a previous projection of 2.8 per cent this year and 2.6 per cent in 2011. Mr. Carney likely won't update his own projections, which match the IMF's earlier numbers, until late October, but it's a virtual lock that they will be downgraded.

As to recent events affecting the strength of Canada's recovery, Mr. Carney noted that the U.S. slowdown is more significant to this country than Europe's ongoing troubles. The once-mighty U.S. economy will continue to grow, the bank said, but at or below its long-term trend pace of 2 per cent until the second quarter of next year.

Already, the central bank's analysis shows that at this point in a more typical U.S. recovery, American gross domestic product would be 2.5 per cent higher and Canadian exports would be 6.5 per cent more – translating into $30-billion in sales.

And continued growth depends on much going right in the coming months, Mr. Carney suggested.

``The Bank of Canada does not expect a recession in the United States, although the risk has clearly risen," he 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.''

Across the Atlantic, Mr. Carney said the European situation is ``fragile but fixable; manageable if it is managed."

However, he said the move by central banks last week to guarantee unlimited liquidity for banks on the continent for the rest of 2011 to avoid a funding crunch that cripples global finance must be followed by ``swift and sizable" actions.

Europe needs a more comprehensive plan to ensure its banks have sustainable capital levels on a long-term basis, he said, plus a bigger funding backstop for European governments so bond yields don't soar as they are now in many nations.

At the same time, though, Mr. Carney suggested the immediate steps needed to stop the bleeding must be taken in conjunction with a plan for the longer haul. Europe's monetary union needs to be ``re-found," he said, on a basis of credible fiscal policies and greater flexibility within and among its economies so they can adjust more quickly to shifts in competitiveness.

``Ultimately, Europe's problems cannot be solved by fiscal austerity alone," he said. ``Any durable solution must include a series of measures to rebuild competitiveness.''

The lesson for Canada, then, is to use the current uncertainty and longer-term problems facing the U.S. and Europe to redouble efforts to crack new markets and to invest in the future so the country can take full advantage of rotations in global demand, Mr. Carney said.