What Mark Carney told (Canadian) MPs about the state of the economy

A recap of the finance committee hearing

Bank of Canada Governor Mark Carney was once again answering questions from MPs this morning — not in London this time but in the more familiar setting of the House of Commons finance committee. The conversation spanned household debt, jobs, the Dutch Disease, currency wars, the Bank of Canada’s forecasting abilities and even credit card regulations, which Raymond Côté, NDP MP for Beauport-Limoilou, had strong feelings about but were unfortunately deemed completely outside the BoC’s mandate.

Here’s a what the governor argued, in a nutshell:

  •  On consumer debt and the housing market, it’s so far so good.
    The governor appeared to think several rounds of mortgage-rule tightening and new guidelines on lending standards are working so far. Though an interest rate hike will come eventually, “the prospect of tightening monetary policy is less imminent than we previously anticipated,” he added. Scott Brison, the Liberal MP for Kings-Hants, had gathered some damning numbers about how Canadians were still piling on debt as of January and the average household owes upwards of $27,000, non-including mortgage debt. The governor, unflappable, pointed to page 20 of the January Monetary Policy Report, where a neat chart shows growth in household credit of all kids has been trending down since 2008. Debt is still growing slightly faster than disposable income, he conceded, but, “it is reasonable that we’ll see a stabilization of the household debt to income ratio in the coming quarters this year.”
  • The Bank of Canada’s optimism on GDP growth will likely be vindicated.
    There were a few questions about why the Bank’s forecasts on near-term GDP growth have consistently been more optimistic than virtually anyone else’s. There’s good reason to think the Bank’s rosy view will be vindicated, the governor maintained. The economy must shift from growth fueled by consumption to one propelled by business investment and exports — and he sees evidence that’s starting to happen.
  • On jobs we have bragging rights — and a fair degree of slack.
    Here, Carney and Senior Deputy Governor Tiff Macklem, who was also there, had plenty of numbers to feed the appetites of both the Conservatives and the opposition. For the Conservative audience: Canada has lost half as many jobs, proportionally, as the U.S. in the recession and has since created twice as many — the U.S. has so far recovered only 60 per cent of those lost jobs; 70 per cent of the job growth in Canada happened in the private sector and in industries that offer above-average wages; in terms of employment growth since the recession we’re the best in the G7 — only Germany comes close. For the opposition: Canadians are still working fewer hours than they used to before the recession on average; the employment rate (the ratio of people with a job to all people of working age) has declined from 64 per cent to 62 per cent since 2008 (though that, Carney said, has more to do with boomers than the economy. Stephen Gordon explains why here); the current unemployment rate, hoovering at seven per cent, is still above what it should be if the economy was growing at full speed; also, among the unemployed, the share of the long-term unemployed has increased since the recession — from 13.2 per cent in 2007 to 19.2 per cent now, as Peggy Nash, NDP MP for Parkdale-High Park, reminded the governor — though that’s still a lot better than the 40 per cent the U.S. faces.
  • We still do not suffer from the Dutch Disease.
    Does the governor still believe in what the governor stated on the Dutch Disease last summer, was the loaded question from Conservative quarters. Yes, the governor said. The reason why the most recent increase in commodity prices coincided with a decline in manufacturing exports is that the price hike this times was largely driven by Asian demand — and there just isn’t a lot of Asian demand for Canadian manufacturing exports yet. Previously, it was U.S. demand that tended to drive commodity prices up, and when that happened there was also a coincidental rise in U.S. demand for Canada’s man-made goods.
  • Trying to tinker with the exchange rate is a bad idea. Period.
    Several MPs had been reading up on Japan’s Abenomics and French President Francois Hollande’s complaints about the recent appreciation of the euro. Should Canada try its hand at controlling the exchange rate? The governor did not recommend that. Manipulating the exchange rate quickly invites retaliation under the charge that one is trying to push the rate below equilibrium level to boost exports. Such a charge, by the way, does not apply to Japan’s current stimulative fiscal and monetary policies — Abenomics is a welcome attempt to leave deflation behind, the governor said repeating more or less what he’d said  in Davos. In general, the governor thought, floating exchange rates are a very, very good thing: “It is extremely important that we as a G7 go in united and forcefully to the G20 to enlarge that commitment [to floating exchange rates] as quickly as possible amongst the major emerging economies in the G20, some of whom entirely ascribe to flexible exchange rates and are supportive, others who have a lot of work to do in this regard.” The finance ministers and central bankers of the G20 group of advanced and emerging economies meet in Moscow this week on Friday and Saturday.