OTTAWA – Following the grilling in London last week, outgoing Bank of Canada governor Mark Carney may be in for a second round of tough questioning Tuesday, this time from Canadian MPs.
Canada’s federal finance committee has traditionally tended to be respectful, even deferential, to Bank of Canada governors, but analysts say Tuesday’s two-hour session may see a different tone since it’s the first time the MPs will be speaking with Carney since he announced he’s leaving for the Bank of England in June.
On monetary policy, Carney is likely to be asked why the central bank had been so wide off the mark on its growth forecasts for the second half of 2012, and if the most recent estimate of a two-per-cent advance this year could also be an overshot, given recent underwhelming data.
The governor will also likely be grilled on his decision to depart for a bigger pond while the Canadian economy is still fragile and over reports he was approached to run for the Liberal leadership at the same time he was vacationing with Liberal finance critic Scott Brison.
Few expect the Canadian hearing will be as gruelling as last week’s near four-hour marathon before a panel of British MPs. That session began with the chairman bluntly asking Carney to explain why he at first turned down the Bank of England job, then changed his mind, followed by whether he was worth $1.3 million a year.
It was a “thorough grilling,” said TD Bank chief economist Craig Alexander, but understandable under the circumstances.
The economy in the United Kingdom continues to drag along the bottom — having already suffered through a double-dip recession — and now faces the possibility of the third extended period of contraction.
“So I think it’s only natural you would expect a testimony to the (U.K.) Treasury committee to be a tough event because they are basically evaluating whether this foreign national should be allowed to conduct monetary policy for England,” he said.
Alexander points out that circumstances are far different in Canada, which has enjoyed mostly an expanding economy since the recession, better that average employment growth and a sound banking system.
But Bank of Montreal economist Doug Porter says the circumstances surrounding the hearings are sufficiently distinct from past Carney appearances.
“It might be interesting this time, given the political dimension and the fact that Mr. Carney is leaving in June, so it will be interesting to see if the tone changes,” he said.
“Hopefully the discussion will revolve mostly around the economy. I think there are some concerns here the bank needs to address.”
The Bank of Canada has been at the upper end of the forecast consensus for most of the past year, particularly for the last two quarters of 2012.
Although the bank did a mea culpa in January, last week’s trifecta of bad economic news — outright job losses, lower exports volumes and plummeting housing starts — casts further doubt on the bank’s 2.3 per cent call for the first quarter of this year, and also the two-per-cent forecast for 2013 as a whole.
The economic consensus is down to 1.8 per cent for this year and some, like research firm Capital Economics, now believe growth will average no better than one per cent.
Porter said it is not inconceivable that Carney may admit to a further downgrade in his projections at Tuesday’s meeting.
“That’s where I’d like to see the conversation go. What’s going on here? Is it short-term or have we badly underestimated the potential of the economy?” asked Porter.
Another sour development, to some economists, is the suddenly ice-cold Canadian housing sector. Carney supported the government’s clamp-down on mortgage rules in July to slow down household debt accumulation, particularly on mortgages.
But the correction may be more than Finance Minister Jim Flaherty and Carney bargained for. On Friday, CMHC reported that housing starts collapsed to 160,600 annualized for January, a 19-per-cent tumble in one month.
Capital Economics cited the new housing downturn in their revision of gross domestic product growth to one per cent.
“In theory it is possible that… the drop in January’s starts figures could just be statistical noise,” explained chief economist David Madani. “Coupled with the corresponding slump in building permits over the past couple of months, however, it is clear this is no statistical fluke, but rather the start of a severe downward trend.”
Carney could also face question about the impact of falling oil prices on the economy.
Last week, Flaherty told reporters lower commodity prices were starting to have a detrimental impact on government revenues.
According to Bank of Canada research on the deficit between what Canadians pay for oil and what Alberta producers receive, it can be as high as $40 a barrel at times.
Monday, February 11, 2013