...against fictions and other tall tales

Monday, 12 December 2011

BoC Governor Mark Carney: Growth in exports, government spending or business investment needed to eliminate the household net financial deficit

A quick post. The Governor of the Bank of Canada, Mark Carney, gave a speech today on the risks facing Canada and the world economies. While the speech contained many of the same themes covered in the December edition of the Bank's Financial Stability Report released last week (see here), a noticeable emphasis was placed on the issue of Canada's household indebtedness. This is not surprising given that Canada's 2011Q3 National Balance Sheet figures are expected to be released tomorrow.

From a Canadian standpoint, the most important part of the speech was when M. Carney's discussed the different ways in which the net financial deficit of Canada's household sector can be eliminated. According to M. Carney, the deficit of the household sector could be eliminated through a combination of export growth, government spending and business investment.

But it is clear from the speech that M. Carney would prefer that Canada's business sector, which is currently running a significant net financial surplus, take a leading role in helping to stimulate the economy while households are seeking to reduce their level of debt. This approach may sound familiar to regular readers of this website. Here is the relevant excerpt of the speech:
To eliminate the household sector’s net financial deficit would leave a noticeable gap in the economy. Canadian households would need to reduce their net financing needs by about $37 billion per year, in aggregate. To compensate for such a reduction over two years could require an additional 3 percentage points of export growth, 4 percentage points of government spending growth or 7 percentage points of business investment growth.

Any of these, in isolation, would be a tall order. Export markets will remain challenging. Government cannot be expected to fill the gap on a sustained basis.

But Canadian companies, with their balance sheets in historically rude health, have the means to act—and the incentives. Canadian firms should recognize four realities: they are not as productive as they could be; they are under-exposed to fast-growing emerging markets; those in the commodity sector can expect relatively elevated prices for some time; and they can all benefit from one of the most resilient financial systems in the world. In a world where deleveraging holds back demand in our traditional foreign markets, the imperative is for Canadian companies to invest in improving their productivity and to access fast-growing emerging markets. (emphasis added)


  1. C'est vrai, mais au moins on est pas une economie dechiree par un manque de bon sens, comme l'Europe.

    D'autre part, je ne suis pas du tout certain si la position britannique vis-a-vis l'UE soit optimale. La plupart des lecteurs du SQ (squall watch) sont plus pessimistes a l'egard de la GBretagne.

    On verra

  2. Seen the Business Outlook Survey lately? Not sure where he expects this Business Confidence to magically appear from .... apj

  3. @circuit - nod for your BoC posts. I coined the medical metaphors because the patients, and there are many are susceptible to contagion. As far as I know, the expressions are NOT in the literature...I got the idea from an article you wrote a while back; so they are yours.

    Joe Stiglitz wrote an article for Vanity Fair. Aside from the history which is pop by now, it was unfortunately disappointing. Maybe the audience influenced the content. In that sense, it sensitized that audience to possible solutions.

    Unfortunately, both Messrs Stiglitz and Carney expect too much from business...it won't happen. The better Corporate Balance Sheets are very solvent; highly liquid and will not flirt with inspiring entrepreneurship. Boards are no longer risk-prone. Those times are over for a while. Govts must do it all, and ensure that Corporations follow through...if they don't, tax them!!!

  4. @YB: Short of a massive Keynesian plan, the UK is looking at years of hardship. As for whether the UK will benefit from the rift, I cannot say. But remember that the UK *is* a sovereign issuer of currency, which in my book represents a huge advantage.

    La GB a fait fausse route en allant de l'avant avec ses compressions budgétaires. À mon avis, il sera difficile pour ce pays de s'en sortir. Et ce, même si elle mets en place des mesures keynesiennes. Il est trop tard. Comme j'ai mentionné dans un billet précédent: 'the fog has set'.

    @ Anon, your point is well taken. I tend to agree with you that the corporates won't play along. But I will tell you this, it took some nerve for M. Carney to stand there in the Empire Club and tell a corporate audience that they're part of the problem. I didn't particularly find the entire speech very convincing. But I thought the incentives he listed in the excerpt above have merit.

    @GC, I'll have to read the JS piece from VF. Thanks for the permission to use the expressions. I often use medical terminology in policy discussions. 'Paralysis' being a favorite of mine, especially these days. Especially in regard to the corporates.

    As I mentioned to Anon, I'm not convinced either that moral suasion will work with the business crowd at this point in time (for many of the same reasons you state). That's why I suggest implementing a tax on unused, accumulated retained earnings, as my May 21st column suggested. Glad to know you agree with the policy prescription I've proposed!

  5. I don't know about it taking nerve so much ... After all, the business lobby/conservative/supply side/tax cut crowd are all about their lofty status as 'job creators', as if we should bow at their entrepreneurial brilliance. They were probably uncomfortable being found out more than anything, in between an entree of Say's Law Smoked Salmon and a main of Laffer Lamb cooked 48 ways.


  6. Apj, uncomfortable they must have been. And with debt to equity on the rise, expansion is probably the last thing on their minds now.

  7. Improvement in exports should be 4.5%. I will let the pundits verify the figure. Moreover, that can only be achieved if global demand increases, which it won't in the next year to 18 months; if commodity prices remain the same and they won't within the latter time period,they will continue to decrease as demand falters; and if the loonie stabilizes respectively. Unfortunately, the loonie may strengthen by default as differentials in the spreads widen adversely, while we just sit around.

    I suggest that BoC and GoC can control the third. In fact, a more reasonable approach is to let the loonie depreciate with some help from the BoC. The quicker the better.

  8. Nod Swells! Good point. The BoC needs to lower the rates to enable greater export growth. I concur that global demand and thus commodity prices will weaken/fall. I appreciate you specifying that the loonie may strengthen by default. IMO, that's a good reason for letting the loonie depreciate asap. A more activist (I use the term mildly) use of the BoC is exactly what is needed (in addition to fiscal stimulus, which, by the way, M. Carney does not explicitly reject in this speech). The inflation hawks may not endorse the move to lower rates, but with lower commodity prices and weak global demand, inflation fears at present are unfounded.

  9. Nod to you circuit, for finding the time and effort to align and calibrate different optics for our policymakers; to stimulate conversations in order to make this country a great place to live in by supporting democratic institutions like Parliament and Bank of Canada. Everyone needs support, especially these days. Mr. Carney does have some flexibility; but it's easier to wait and watch. The downside of the latter strategy is that it can be too late.

    In passing, France should stop bad-mouthing the UK. It reflects more the type of shallow leadership since DeGaulle that the political class has spawned than statesmanship. I hoped Mr. Sarkozy could restrain his cohorts from voicing 'rubbish'. If only Messrs Noyer and Baroin were a percentile as resourceful as Mr. Mervyn King, they would deserve some consideration and part audience. I hope that Mr. Cameron and cohorts take the high road, and resist entering into country-bashing!!

    Is this the rhetoric of diplomacy from the country that once hosted the 'language of diplomacy' As an old man would say: "Il faut jamais s'aventurer dans les 'bas fonds'" But then he was of that gritty French generation that remembered the art of statesmanship.

    Mr. Sarkozy, get those two actors off the stage.

  10. @swells (nod) you beat the thunder again. the french media and public, in general, take the same position as you on the noyer/baroin incidents: they didn't like the UK-bashing. the two are due for a rehaul!!! by Mr. Sarkozy

    what noyer doesn't understand, and is deliberately obfuscating from the public is that france, contrary to the UK, cannot guarantee repayment of its SOVEREIGN contractual obligations because it is not a sovereign-issuer. in fact, financially, france is no longer a sovereign debtor, under conventional legal parameters. in other words, the Bank of England can print pounds on demand to repay its creditors (regardless of the currency's value) whereas noyer cannot print anything but 'noyer's verbal rubbish' without non-french approval. Mr. Draghi understands the dilemma and the predicaments facing the ECB!

    for this overwhelming reason, noyer is steering the agencies' evaluations away from the very fundamental weakness of the 'euro setting' versus sovereign currency issuers, to a supposedly more rational and critical perspective: the inherent (???/lol) strength of the french economy versus the uk economy.

    on the other hand to be fair to the rating industry, the agencies are now coming to terms with the underlying polemic surrounding the US downgrade vis-a-vis the Euro-Area setting. your link CI called it a BUFFA...months ago, the Europeans are now calling the french initiative 'une farce' even germany is not immune, and it shouldn't be.

    better a verbal squall than a belly-flop.

  11. @jhcraw I am not certain if Mr. Sarkozy can legally overhaul Noyer and Baroin, at least directly. On the other hand, since jh is usual careful in such matters, I assume I am missing something. Is there a third to be 'rehauled'.

  12. @kp lol...you are right,good followup, well done. m. sarkozy can't directly, but pm fillion can for one of them; baroin is his responsibility.

    m. noyer is an easy reprimand; not much there.

    thinking about it, not much in any of the three. m. sarkozy can offer fillion an extended holiday until after the election which sarkozy may lose anyways as a result of this 'farce' by 'les trois amis'

  13. My apologies: m. fillon for the typo.