World debt will impact Canada as well, says Carney

OTTAWA — Canada’s fiscal advantage will only go so far in protecting the country against a debt crisis growing in the world’s advanced nations and Asia’s emerging economic powerhouses, Bank of Canada governor Mark Carney warns.

Trying out a theme he will likely take to Washington later this week, Carney told the Canadian Club of Ottawa on Monday that the world is in the midst of a major economic power shift and governments must prepare by getting their fiscal houses in order.

Advanced economies face a protracted period of slow growth as they struggle to come out from under a mountain of debt, while emerging economies such as China will face the opposite challenge of restraining inflation.

“In this environment, domestic macro stability is paramount,” he said in notes from the speech released prior to his address.

“Sustained fiscal adjustment is now required in most advanced economies. Debt-to-GDP (gross domestic product) in G7 countries is now the highest since the Second World War. The age of austerity is not a slogan but a timetable.”

The issue of debt in Europe and increasingly in the United States has become one of the key challenges for the global economy, both in the long and short terms.

Last week, Finance Minister Jim Flaherty took his concern about the U.S. debt situation to Washington, since what happens there has direct implications for Canada on everything from exports, to interest rates to the value of the loonie.

Carney said experience suggests when debt exceeds 90 per cent of GDP, economic growth will slow, and that is a situation facing most of Canada’s major trading partners, particularly the U.S.

Canada is one of the few advanced economies that is not in that position — debt to GDP is projected to start falling as both Ottawa and the provinces move to balanced budgets. But that doesn’t mean Canada won’t be sideswiped, as it was in the 2008 recession when a financial meltdown among other countries submarined Canadian exports, Carney said.

“Fiscal slippage by some major countries may increase interest rates for all,” he said. Moreover, if growth in the U.S. and Europe is slowed, Canadian exports will again feel the pain.

The governor gave no hint about his own long-term plans for interest rates in Canada, suggesting that he will not hike the policy rate on May 31.

The transformation in the world, with three quarters of growth coming from emerging markets, does present an opportunity for Canadians, Carney added, but so far the corporate sector has not taken full advantage of it. Emerging market growth has boosted demand for commodities, leading to higher prices that have stimulated production and investment in the Canadian sector, he notes.

But the corollary is that only 10 per cent of Canada’s exports go into these fast-expanding markets and taking commodities out of the equation, Canada’s exports share into these markets has been almost halved in the last decade.

“Increasing market share in emerging markets will require sustained efforts to develop trade, technical and academic partnerships,” he said. “In tandem, Canadian business needs to improve its competitiveness, source new suppliers and prepare to manage in a more volatile environment.”