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In a recent speech in Windsor, Ontario, Bank of Canada governor Mark Carney said that given the risks of a renewed U.S. slowdown and amid slow consumption and housing activity in Canada, “any further reduction in monetary policy stimulus would need to be carefully considered.”
Carney’s remarks came the same day new data showed Canada’s gross domestic product contracted for the first time in 11 months by 0.1 per cent in July.
While the Bank of Canada has raised interest rates three times in the past four months, most recently on Sept. 8, and the bank’s key overnight lending rate is currently 1.0 per cent, during the same time in the United States, the Federal Reserve has held the policy rate at almost zero.
“While Canada’s circumstances and the discipline of the inflation target dictate a different stance than in the United States, there are limits to this divergence,” he said.
The recession may be over, he warned, but it’ll still a long road back to a strong economy. Domestically, Canada’s relatively strong bounce-back from recession has been supported by housing expansion and personal consumption, two factors that can’t continue, Carney said.
“This cannot continue. With Canadians working, but not as much as they would like, they have been borrowing. Real household credit expanded rapidly throughout the recession, in contrast to previous downturns, and has continued to grow through the recovery. Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years. In effect, households are demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s.”
Externally, he said, the world is facing a restructuring that could take 10 years and subdue growth in the advanced economies. Even Canada’s supposedly strong jobs recovery is not as shining as it looks. The unemployment rate remains high at 8.1 per cent and many of the jobs created since July have come in the public service and what he called involuntary part-time work.