When will Carney raise interest rates?
Since he became the Governor of the Bank of Canada in 2008, Mark Carney has distinguished himself on a number of fronts.
During the global financial crisis, his swift actions to increase liquidity and lock in low interest rates are credited with helping to stabilize Canada’s economy. He gained international recognition for his sound judgment and leadership, something that was reflected in his appointment as chair of the Basel-based Financial Stability Board in 2011. Carney has also played an active role on the domestic front, repeatedly warning Canadians about the consequences of their high household debt levels, and attempting to “jawbone” them into remedial measures.
That “jawboning” — speeches and pronouncements used by central bankers to gently and informally re-direct markets — ended up causing some dislocation recently.
The failure to “soften” his public language on debt and the outlook for the Canadian economy led to a flutter of concern (quickly reflected in the value of the loonie) that interest rates might be poised to rise sooner rather than later.
Carney had to then clarify that “the case for adjustment has become less imminent” — suggesting that the Bank’s rates will remain at one per cent for the foreseeable future. He did add, however, that “over time rates are more likely to go up than not.”
Given the extreme subtlety and nuance around every painfully scrutinized word, it’s tempting to dismiss the whole flap as a tempest in a teapot. International markets moving because of a verbal nuance or emphasis? Has it really come to that?
Clearly it has. And for good reason.
Canada is in a remarkable economic conundrum at the moment: as we all know, low interest rates have fed record high levels of personal debt. And Carney has clearly identified that debt as one of the greatest risks to economic recovery.
If interest rates rise, many people will be unable to manage the higher interest payments. A recent survey from BMO, for example, indicates that nearly three-quarters of Canadian households would feel acute pressure if there’s even a modest increase in their monthly mortgage payments.
Family finances are already fragile across the country: after-tax family income has been flat for the past three years (at around $65,000 annually), while the unemployment rate is stuck at about 7.3 per cent.
On top of that, the 2012 National Study on Balancing Work and Caregiving in Canada shows that the amount of hours in the weekly work week is up 50 per cent over the past 20 years to 45 hours. Only 23 per cent of the population is “highly satisfied” with this life — which means there just isn’t much juice left to squeeze out of the lemon.
All of that’s an obvious source of concern, but it’s also exacerbated by some fundamental, structural changes to the domestic economy. And that’s what’s making Carney’s position particularly tricky.
Essentially, our economy has become excessively dependent on the evil twins: consumer and government spending. Statistics Canada data shows that in 2010, consumer spending accounted for 64 per cent of domestic GDP, up from 56 per cent a decade earlier. Government spending accounted for 25 per cent, up from 21 per cent in the same period. Meanwhile, business investment has stayed flat at around 18 per cent.
The really disturbing news is that Canada’s export sector has continued to atrophy. In 2000, exports generated 44 per cent of GDP — that’s now closer to 33 per cent. Economist Ranga Chand notes that that there was a marked decline in Canadian exports between 2000 and 2005, when both the U.S. and the global economy were healthy.
At the same time as exports have been on the slide, imports have been rising — no doubt fuelled by the relative strength of the Canadian currency. That has expanded the gap between exports and imports to a historically high level of 10 percentage points.
And export/import issues are impacted by interest rates and household debt.
The obvious way to reduce household debt would be to squeeze it with higher interest rates — something Carney has clearly and repeatedly flagged. But not only would higher rates cause distress for many Canadian families (stress that would have political consequences), it would also make the loonie stronger.
A stronger loonie exert even more negative force on an already-weak export sector. Commodities in particular have been battered by economic slowdowns in the U.S. as well as China and other emerging economies which previously exhibited ravenous demand — until they didn’t.
That leaves Carney with the economic equivalent of a dog chasing its tail. Every action leads to the same circular outcome and extreme dizziness. No wonder every word counts — not to mention tone and inflection.
It’s quite an accomplishment to yell as loudly as he is, without being able to raise his voice.
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