MONTREAL – Bank of Canada governor Mark Carney is warning governments they must withdraw their unprecedented monetary support for the financial system when the time is right or risk stunting the economy.
The central banker says public sector interventions have been necessary but global economies will only truly recover when the private sector re-engages and assumes the risk.
In a speech calling for a new, more responsible return to globalization, Carney says the world cannot withstand a situation where governments are the main agents of growth and the key guarantors of financial market stability.
“Ultimately, a return to sustained growth in private sector demand that can accommodate desired private savings is essential,” Carney told the International Economic Forum of the Americas in Montreal.
He notes that across the G-7, the average government deficit will be 12 per cent of gross domestic product and, around the world, about two per cent of GDP.
As well, the G-7 countries, which include Canada, have committed that no vitally important financial institution will be allowed to fail.
As a result, bank finances have been guaranteed, assets have been purchased and governments have even guaranteed warranties on certain car models, Carney noted.
While the support has been necessary, Carney said “expedient should not become permanent.”
“The public sector’s recent assumption of some risks creates a moral hazard. If left unchecked, this will eventually promote private behaviours that will add overall risk to the system.”
Carney said fiscal stimulus by governments has been essential, but should be short-term, lest they lead to upward pressure on interest rates and reduce household consumption that retards the recovery.
But he said it’s premature to consider withdrawing interventions at the first hint of improvement.
“We shouldn’t overplay, at this stage, the green shoots and we shouldn’t underestimate the scale of the challenge,” he told reporters after the speech.
“Economies are going to grow initially because of the scale of monetary and fiscal stimulus, not in spite of it.”
He said the Bank of Canada has no plans to adjust its rates until at least next June as it attempts to keep inflation at check below two per cent.
Carney warned that the world recovery will be more muted than past rebounds from recession and the future potential growth will also be lower, due to the time it will take to correct global imbalances and rebuild private sector savings.
Even at this time, when there are encouraging indicators in economies around the world, Carney warned that success is not a given.
Rebuilding globalization will take time, he said, and Canada, while it could benefit from increased demand for commodities, is threatened by the upward pressure on the loonie, which could price many manufactured goods out of world markets.
Unemployment will likely rise further across the G7, with the sharpest increases coming from economies with the least-flexible labour markets.
“Uncertainty over the employment outlook will weigh on consumption in most major economies for some time,” he said, adding global investment growth will likely remain negative well into 2010.
Carney called on central banks to adopt four priorities to help the process, including better transparency, promoting an open and flexible international monetary system that accepts responsibilities of their action on global systems, and adoption of so-called macroprudential regulations that seek to regulate the financial system as a whole.
He predicted Canada will be among the first countries to carry through with the reforms.
Meanwhile, Carney downplayed the impact on the Canadian economy of the World Health Organization’s decision to raise its pandemic ranking to its highest level.
He referred to the H1N1 flu pandemic as low-grade “which has a much milder impact on the economy and not necessarily at this stage a discernable impact on the economy.”