OTTAWA – Canada’s economy can bounce back next year but only if the United States and other world governments take “exceptional” measures to end the crisis in financial markets, says Bank of Canada governor Mark Carney.
The hopeful and sobering assessment comes a month after the central banker put his credibility on the line with what other economists called an overly optimistic forecast pointing to a strong rebound next year after a tough 2009.
“Decisions taken in the coming weeks in the United States and in other major economies to isolate toxic assets in order to create a core of ‘good’ banks will be critical,” Carney said in his first appearance before the House of Commons finance committee since the recession hit Canada in the fall.
“If these national and multilateral measures are not timely, bold, and well-executed, Canada’s economic recovery will be both attenuated and delayed.”
Shortly after Carney spoke, the U.S. Senate approved President Barack Obama’s giant economic stimulus measure, part of a string of powerful government steps that could marshal close to US$3 trillion in taxpayer and private money to revive the collapsing U.S. economy.
The 61-37 vote by the Senate was a key victory for Obama, but sets up tough talks with the House of Representatives, which passed a slightly different version than the $838-billion bill approved Tuesday.
A senior Canadian Finance Department official called the moves helpful in stabilizing the financial system and restarting the flow of credit.
The U.S. plan will be a topic at the weekend meeting in Rome of G7 finance ministers and central bank governors where Finance Minister Jim Flaherty is expected to be the lead speaker on a discussion on financial markets.
In his Commons committee appearance, the Canadian central banker pointed to the U.S. bailout bill as an example of the extraordinary policy initiatives he believes can rescue the global economy. In Canada, MPs approved in principle last week the federal budget containing a $40-billion stimulus – initiatives Carney believes will fully kick in in 2010.
Under skeptical questioning from MPs, he stuck to his prediction of a 3.8 per cent growth in 2010 and dismissed criticism that his forecast was overly rosy.
“We don’t do optimism; we don’t do pessimism; we do realism at the Bank of Canada,” he said. “We don’t do spin.”
Liberal finance critic John McCallum was encouraged by Carney’s optimism, but said he is not convinced the Harper government is committed to rolling out the $40-billion stimulus contained in the budget as quickly and effectively as possible.
Although Canada is doing slightly better than the U.S., McCallum noted that 129,000 jobs were lost in January alone, while personal bankruptcies soared by 51 per cent nationally in December from a year ago – indications the slump is broadening.
The TD Bank has estimated job losses could hit 325,000 by the end of the year, pushing the unemployment rate to 8.8 per cent.
In another sign of the bleak times, General Motors Corp. became the latest of a growing list of companies announcing massive layoffs. It said it is cutting 10,000 salaried employees worldwide, including an unspecified number in Canada, where the company has 2,000 white collar workers.
Elsewhere, Edmonton-based private forestry company Millar Western cut production and chopped 138 jobs at its lumber and pulp operations in Alberta, the latest in a series of cuts in the battered forestry sector.
Economists expect the Canadian economy to shrink by more than one per cent this year as the troubled manufacturing sector in Ontario and Quebec continues to shed employment and resources industries in Western Canada cut jobs to cope with lower prices for oil, grain, metals and minerals.
McCallum added he has heard complaints from small businesses that the Business Development Bank, which was given additional funds in the budget to extend credit, is delaying implementation of a plan.
“Businesses depend on credit to create jobs and the credit crunch is just as critical as the fiscal stimulus issue,” he said.
Despite the mounting bad news, Carney said he believes the major monetary and stimulus programs will work.
In Canada, he noted that the bank has cut short-term interest rates by 3.5 percentage points to an historic low of one per cent, and has injected up to $41 billion in cash by exchanging collateral from banks.
And these have resulted in lower prime interest rates and lower variable mortgage rates, he said.
Carney added he is prepared to take other measures, including further cuts to interest rates and extending liquidity, or cash, if necessary.
The bank’s optimism received some backing from the University of Toronto economist Peter Dungan this week, who has a similar expectation of recovery.
But Bank of Nova Scotia economist Derek Holt cautions that most private sector economists remain far gloomier about Canada’s near-term economic future. His bank’s forecast is for a tepid 1.6 per cent growth rate in 2010 – about one-third Carney’s – and not enough to reverse this year’s expected losses.
“I honestly think that over the course of the next year we’ll see Canadian housing and consumer markets catch up to the kind of deterioration we’re seeing in the U.S.. We’ll probably get hit as much on the real side of the economy,” he said.