The sobering reality of our economic situation has bitten Mark Carney like an angry terrier. Just a few months after raising interest rates while citing an improving economy, Carney has been on a media whirlwind tour discussing the significant challenges we now face.
He discussed some of his concerns with the Toronto Star:
“This is going to be a different form of recovery globally, and that has real implications for Canada…These are extraordinary times—the challenges we face have only just begun.”
I agree it is a VERY different global recovery. This one is almost entirely sustained by emergency interest rates and government stimulus. Tack on to that a collapsing demand for imports from the US, a Chinese economic miracle that is anything but, and our own home grown challenges and you have a ‘recovery’ unlike any other. Were it not for the strong bounce in equity markets and a gravity-defying housing market, the populace would have a hard time believing there’s any recovery at all.
“Canada’s economy, which appeared to be roaring back to life a year ago, has already slowed markedly and is likely to experience a prolonged period of modest to sluggish growth.”
“With conditions looking up last spring, Carney felt it necessary to begin raising the Bank’s overnight rate by 0.25 per cent in June as a hedge against a possible burst of inflation. And by early September, it had reached 1 per cent, where it still sits.”
“I think it’s clear that the Bank was overly optimistic about the economic outlook when they started raising rates,” says Canadian Labour Congress economist Andrew Jackson. “Probably if he knew then what he knows now, Carney wouldn’t have been raising them as he did.”
Vindication? Here’s a snippet from a blog entry on this site from September:
“I’ve been wondering lately if perhaps the Bank of Canada is going to try to orchestrate another ‘shock and awe’ emergency rate cut in order to spur credit demand. I just cannot fathom why Mark Carney would raise interest rates in the face of what is so obviously a smoke and mirror recovery. An article out today in the Grope and Flail suggests that Carney’s rate decision tomorrow is a tough one.”
“I disagree. From a Keynesian monetary perspective (which Carney adheres to and I despise) it’s a clear-cut decision: Hold the line. However, I’m starting to grow suspicious that perhaps the idea here is that they will let interest rates rise incrementally for a period of time and let it garner a lot of media attention….(then) they can slam rates back down to emergency levels….I can’t help but wonder if they aren’t trying to set us up for a similar rush to capitalize on ‘record low interest rates’.”
Back to the article:
“Now, we are out of that easy bit,”…Federal and provincial stimulus programs, which together are pumping nearly $60 billion into the economy, are coming to an end. And the boom in the housing sector “can’t go on forever,” Carney said.”
“Private debts are very quickly becoming public debts,” he explained, referring to the huge deficit financings mounted by governments to sustain economic demand when business and household spending slumped in 2008.”
Indeed. Therein lies one of the great structural issues in our economy. Our economic recovery was built upon the ephemeral effects of stimulus spending and wealth effect-induced consumer spending. As the government is forced to embrace austerity, consumers will need to step up their spending from its already lofty levels of 65% of GDP. Yet with consumer debt at unprecedented levels and home prices at lofty valuations and set for a decline, I can’t see them pulling providing the growth necessary to avert significant economic pain.
“With an eye toward Ireland, Portugal and Spain, he added that the result (of government stimulus spending) is “putting a number of countries in fiscal difficulty.”
Not just countries….
Are some provinces facing a European style debt smackdown?
Some people seem to think so:
“Under a scenario he assembled…he discovered New Brunswick’s deficit in 2016 would hit $2.1-billion, up from the projected $818-million shortfall this fiscal year. To avoid a deficit that large, Mr. Drummond estimated, New Brunswick would have to raise taxes across the board by 42%.”
That will go over real well. It’s not just New Brunswick!
“The downgrade may be just the beginning for New Brunswick as well as for other provinces such as Ontario and Quebec whose balance sheets and economies bear a closer resemblance to troubled peripheral Europe than they do with the rest of Canada. These problem provinces can’t solely blame the deep recession for their fiscal woes, either. Years of robust spending growth ahead of the crisis — done despite repeated warnings that such expenditures were unsustainable — have exacerbated matters.”
Ontario’s fiscal issues are well documented. Earlier this year, Mike Shedlock ran a great piece comparing Ontario to California. If you know anything about California, you’ll know that it is often criticized for its massive debt levels relative to other states.
As also noted by Business Week earlier this year, the bond market won’t tolerate Ontario’s massive growing debt levels indefinitely without asking for a significant risk premium, which would make funding deficits significantly more burdensome.
Indeed, the nation and the provinces continue to play Russian roulette with the bond market. The end game here is predictable: Austerity in future budgets. The only question is whether it will come voluntarily or in the form of a bond market whoopin’.
Either way, the next decade will look nothing like the past 50 years.