Bank of Canada Governor Mark CarneyFred Lum/The Globe and Mail
Recovery from the worst global slump since the Great Depression promises to be agonizingly slow as governments and consumers in the developed world struggle to claw their way back, restraining Canada's comparatively healthier economy.
Statements from the central banks of Canada and the United States paint a troubling outlook, particularly for the European and U.S. economies. But even emerging markets will be held back, hit by the weakness in the more advanced economies.
This outlook prompted the Bank of Canada Wednesday to signal an extended period of borrowing costs at near-emergency lows, as the shaky global landscape lessens the need to make it harder to borrow and spend. The central bank held its benchmark rate at 1 per cent for the eighth time in a row, and economists expect it won't hike again until the second half of next year.
The Bank of Canada outlook, coupled with a regional report from the Federal Reserve, suggest there's no quick fix as Europe struggles through a debt crisis and the United States grapples with slow growth, high debts and millions of unemployed, threatening a prolonged period of pain and angst that will span the globe.
"The European sovereign debt crisis has intensified, a broad range of data has signalled slower global growth, and financial market volatility has increased sharply," Bank of Canada Governor Mark Carney and his colleagues said in their policy announcement.
"Recent benchmark revisions show that the U.S. recession was deeper and its recovery has been shallower than previously reported. In combination with recent economic data, this implies that U.S. growth will be weaker than previously anticipated," the central bank said.
High debt loads, joblessness and lower net worth will continue to squeeze household spending in the United States, the bank said.
Across the Atlantic, the European debt crisis could lead to ``more severe dislocations in global financial markets'' unless there are ``additional significant initiatives by European authorities'' to figure out a way out of a mess that has already caused financial strains and inspired brutal austerity measures that are choking growth.
In addition, while growth in emerging-market economies has been ``robust,'' the bank warned that it will be ``affected by weakness in major advanced economies."
Where Canada is concerned, the central bank's rate-setting panel noted that the economy stalled in the second quarter, but expects growth to pick up in this half of the year amid "stimulative" conditions. Still, exports will be held back by weaker global demand and a strong Canadian dollar.
In Washington, the Federal Reserve released a survey of its regional offices that showed the U.S. economy expanding "at a modest pace," but some parts of the country experiencing "mixed or weakening activity" because of skittish consumers and a pullback by factories.
The message in Canada has definitely changed.
Just weeks ago, Mr. Carney was expected to raise interest rates at least once before the end of the year, as policy makers watched for inflation signs in a healthy domestic rebound that was the envy of the Group of Seven, and as they fretted that too many households were using ultra-cheap money to amass dangerously high levels of debt.
At this point in the rebound, though, the best-case scenario seems to be Europe finding a solution to its debt crisis and U.S. policy makers figuring out a way to stop confidence from sliding, but much of the world nonetheless still feeling stuck in the mud years from now. A scarier, but arguably less likely, scenario is a worsening euro zone crisis that paralyzes the banking system, confidence continuing to drop in the advanced economies, and emerging markets eventually being pulled under, too.
``If not for Europe, this could go on indefinitely,'' said Nicholas Rowe, an economist at Carleton University in Ottawa who sits on the C.D. Howe Institute's shadow monetary policy group. ``The U.S. could continue muddling along indefinitely, rather like Japan has -- not getting worse, not getting better. Europe looks different; it's just getting slowly worse, and worse and worse.''
As well, the stimulus spending that propped up the U.S. recovery will soon give way to restraint and cuts.
Many investors and some economists, including Prof. Rowe, say the central bank's next move could be to lower interest rates. Other observers argue that isn't likely.
``The market expectation is we're back in crisis mode, but I don't think we are,'' said Denis Senecal, vice president and head of fixed income investing at State Street Global Advisors (Canada) in Montreal. ``It will be a long period of time before we see any rate hikes, globally, but we don't see a rate cut unless there's much more deterioration in the global economic picture.''
Christopher Ragan, an economics professor at McGill University in Montreal who was a guest academic at the Finance Department in 2009-10, said if things do get worse and a global recession becomes more likely, it's unclear whether an interest-rate cut would do much good.
The reason is because, unlike the 2008-09 credit crisis, there is plenty of monetary stimulus in the financial system, and neither households nor businesses are having difficulty accessing loans.
The best way to mitigate another slump, should it become more likely, would be through a return to government stimulus, he said, such as by putting money in the hands of people without jobs.
``Of all the countries in the world, we have the fiscal room to do this if and when it becomes necessary,'' Prof. Ragan said.