Don’t be fooled by quick recovery, Mark Carney cautions
Bank of Canada chief Mark Carney warned against taking a faster-than-expected recovery to mean the financial crisis was less severe than advertised.
The International Monetary Fund last week revised its outlook for global economic growth this year to 4.2 per cent, from 3.9 per cent in January, and the Group of 20 finance ministers and central bank governors said Friday that the “global recovery has progressed better than previously anticipated.” The committee of finance chiefs that direct the work of the IMF made a similar statement at the end of its meeting on Saturday.
Mr. Carney, who participated in both meetings, said consumers, executives and investors would be wrong to conclude it is business as usual.
“Anyone who sits and looks at what happened and says, ‘Well, that wasn’t a Great Recession,’ hasn’t appreciated the scale of what was done to ensure an outcome that wasn’t as extreme as before,” Mr. Carney told reporters Saturday. “Particularly on the fiscal side,” Mr. Carney added. Anyone who doesn’t appreciate the gravity of the last couple of years “hasn’t thought through or appreciated the scale of what will be required to adjust fiscal back to normal.”
Sovereign debt in the G7 industrial nations, which includes the world’s biggest economies with the exception of China, will approach 120 per cent of its collective gross domestic product, the highest in 60 years, according to the IMF.
“We’ve seen war-like spending in peacetime,” Mr. Carney said.
On the surface, a 4.2 per-cent increase in global GDP looks pretty good. The average between 1992 and 2001 was 3.2 per cent. The figure matches the average global economic growth between 2002 and 2008.
Yet the current headline numbers mask the fact that the world economy still is being powered mostly by hundreds of billions in government spending and extraordinary monetary stimulus. The growing debt – mostly public, but also private, as consumers in countries such as Canada took advantage of record-low interest rates to borrow and spend – is fundamentally changing the makeup of the global economy.
The recovery is happening at two speeds.
Asia, and to a lesser degree Latin America, is powering out of the recession as their middle classes expand and international investors pour capital into emerging markets to take advantage of growth rates as fast as 10 per cent in China, almost 9 per cent in India and 5.5 per cent in Brazil.
The world’s advanced economies will expand only 2.3 per cent this year, as banks continue to restrict credit as they rebuild their capital reserves and consumers curb spending to restore wealth lost in the crisis – or because they are among the millions who remain unemployed.
Slow growth in developed countries causes problems for emerging markets because the increased capital flows create inflation pressures.
The U.S. and Europe are limited by the scale of debt they must pay.
Hanging over the string of high-level meetings this weekend is Greece, which was pushed to the brink of default last week as investors lost faith the country could pay its bills. The cost to sell Greek debt rose to prohibitive levels, forcing Greece to trigger an emergency bailout fund arranged by the European Union and the IMF that will exceed 30-billion euros.
Greek woes serve as a reminder that countries must take their debts seriously – and that there are limits to how much governments can do to generate economic growth. The G20 pledged to implement “credible” exit strategies from stimulus spending. If kept, that promise means less spending and quite possibly higher taxes, two factors that limit economic activity.
“What we are seeing with Greece, and what we have been seeing over the last few weeks, are the indications of the limits of fiscal stimulus,” Mr. Carney said. “There are a number of countries that are having to make adjustments, or will have to make adjustments, to more sustainable fiscal paths and I think that is an increasingly shared realization.”
Smoothing out these economic imbalances is the primary objective of the G20, which was elevated last year as the primary body for organizing international economic policy. The idea is to create a “peer review” process that will attempt to encourage countries to enact policies that will ensure stable, rather than disjointed and inherently risky, expansion.
Nothing like this has ever been tried.
“The question is how long they will stay engaged,” said Tom Bernes, acting executive director of the Waterloo, Ont.-based Centre for International Governance Innovation. “Will you keep leaders engaged when it becomes for technical? Leaders don’t like to tell other leaders how to fix their policies. It’s a fact of life.”
Regardless of the G20’s ultimate success, Canadian businesses must think hard about how they intend to operate in this new global economy, Mr. Carney said.
“We have to look at that and think of how to rebalance our own economic activity,” he said, referring to the strength of emerging markets and the relative weakness of Canada’s primary trading markets in the U.S. and Europe.
Businesses have to “decide whether the only impulse, or the principle impulse, that we want to take from the fastest-growing part of the world is just on the price side, through terms of trade on commodities; or do we want to do so on the volume demand side by selling a wider suit of services and goods to those parts of the world?” Mr. Carney said.