Canadian business must take advantage of strength, become more competitive: Mark Carney

Reprinted with permission from Condo.ca

Mark Carney, Governor of the Bank of Canada: the present debt crisis in Europe has opened a "window of opportunity" for Canadian business to become more competitive, profitable.

Canada’s national net worth increased 1.0 per cent to $6.5 trillion in the third quarter, reports Statistics Canada. On a per capita basis, national net worth rose to $189,100, up from $187,900 in the previous quarter. However, because of the substantial drop in the value of equities—the TSX lost 12 per cent during the period—household net worth actually fell by 2.1 per cent, or $4,600. Although residential real estate assets increased, the decline in the value of equities more than offset the increase.

At the same time, household credit market debt expanded, with consumer credit debt and mortgage debt rising. The ratio of household debt to disposable income now stands at 150.8 per cent. The situation is even more worrisome in the United States, where, according to figures given by Mark Carney, Governor of the Bank of Canada, in a speech to the Canadian Club yesterday, American aggregate non-financial debt is at levels similar to those last seen in the midst of the Great Depression. At 250 per cent of GDP, that debt burden is equivalent to almost US$120,000 for every American.

According to Carney, Canada has distinguished itself through what he calls the “debt super cycle,” the period since 1980 during which a “mountain of debt” was accumulated, with non-financial debt in G7 countries rising to 300 per cent of GDP. This is a level of debt historically associated with widespread sovereign defaults, says Carney. In Canada, however, debt has risen far less than in G7 countries. Here, household, corporate and net government debt have risen about 20 per cent as a percentage of GDP from 1990 to 2010. In the UK, the country with the greatest increase in indebtedness over that period, that increase was about 130 per cent.

Now the countries of the eurozone are entering a period of “vicious deleveraging” and recession, as they try to reduce their indebtedness. But Canada’s “relative virtue” in terms of debt to GDP puts us in a “privileged” position, according to Carney. “Our strong position gives us a window of opportunity to make the adjustments needed to continue to prosper in a deleveraging world. But opportunities are only valuable if seized. “

The first thing we have to do is reduce our economy’s reliance on debt-fuelled household expenditures. The tightening of mortgage insurance requirements we have seen in Canada since 2008 was a good step in that direction, Carney argues. But the burden can’t be borne entirely by consumers. To eliminate the household sector’s financial deficit would require cutting $37 billion from the economy per year. This would necessitate making up the loss in increased exports, government spending or business investment. A “tall order,” according to Carney.

But there is a bright spot in the picture. Canadian business is in a good place, with their balance sheets in “rude health,” giving them the means to act—and the incentives. Canadian firms, says Carney, should first 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.

Then they should act and they have only one sustainable option: increase investment and become more productive. This would lead to higher wages, greater profits and higher government revenues.