I have said in 1 million times, that I need that gig as a governor of the Bank of Canada. I think over a 25-year career I have given the Bank of Canada more publicity than almost any other writer in Canada. There job as a purveyor of Canada’s money as well as our monetary policy has always fascinated me. Think if I had the economic levers for a day. I’m sure that is scary for many of you. However, for me it would be a fascinating look into how the world works. Don’t worry; it’s never going to happen.
We are a very fortunate nation despite our penchant for -40° in the middle of January. I must admit I do not understand winter. I used to walk on the coldest of days in Guelph Ontario to my graduate school classes with thoughts crossed my mind of how an economy can work in such a cold place. Needless to say, our Canadian economy works well and one reason is we have a stable government and banking system backed by the Bank of Canada.
This week Bank of Canada Gov. Mark Carney will be traveling to Washington to talk to their central bankers about the world economy. This past week he gave a bit of a clue on what he would be talking about he said that advanced economies face a protracted period of slow growth as they struggle to come out from a mountain of debt while emerging economies such as China and India face the challenge of restraining the ugly specter of inflation. He went on to say that in this environment, domestic macro stability is paramount. To my economist bones, that sounded so lovely. Translated, that means that Canadian fiscal and monetary stability is job one in a world where developing economies in Europe and the United States are head over heels and that while at the same time burgeoning economies are getting even hotter.
Carney was referring to debt to GDP ratios in G7 countries that are now the highest since World War II. He was suggesting that once debt exceeds 90% of GDP, economic growth slows down. Of course our big concern in Canada is the United States, which has a debt mountain currently approaching 90% of GDP. With European economies facing the same type of issues and our American friends being our biggest trading partners, it is completely obvious that the Canadian economy is at risk because of our trading partners. Keeping our debt levels at reasonable levels is very important for continued prosperity and job growth.
No, we are not necessarily looking over the economic abyss, far from it. What it does say though is that Canadian governments need to continue to make tough choices to reduce debt levels and at the same time sustain economic growth. In other words, our federal government, which has spent money like wildfire over the last two years in response to the recession, needs to rein it in along with other provincial governments. This will mean in the future that we will be well positioned as Canadians to deal with the global economy at risk. It would seem that the federal government is getting that as House leader John Baird announced today that Parliament would be returning June 2nd and the economy is the priority.
Keep in mind that this is a problem of prosperity. Sometimes in southwestern Ontario we forget how rich this country is, and I mean commodity rich. The wealth has shifted in this country to Western Canada, where much of the oil wealth is and many of our commodities. We have much of what the world wants and with three quarters of world economic growth coming from emerging markets in the future, we are well positioned to satisfy those needs. Our trade with emerging markets only represents 10% of Canadian exports now, but the potential is to grow that. In order to do it, we need an economy poised to succeed, which invariably will generate job growth into the future.
If you are a student of history, you will know that it hasn’t always been like this. If I could have lunch with former Prime Minister Paul Martin, he would tell me about as finance minister when he looked out and Canada was facing a debt wall. In other words, he knew if he didn’t do something and make the hard choices, there would be economic hell to pay in the future. Mr. Chretien and Mr. Martin made the tough choices in the 1990s and we are benefiting from that today.
So in the weeks to come you will surely hear about rising debt levels in European and American governments, to the extent that it is becoming unworkable and a drag to economic growth. In Canada, at least for now we don’t face anything of that and it is a very good thing. However, our trading partners do and that’s not so good for us either. Needless to say, I’ll take where we are. Kudos to the Bank of Canada, former finance Minister Paul Martin and to the people who made the tough choices.