Having survived last week's supposed grilling by MPs in London (he ain't seen nothing yet), Mark Carney is back at his current job at the Bank of Canada. On Tuesday he pitched up in front of the Commons finance committee in Ottawa to review the state of the Canadian economy. There's an interesting summary of his appearance before the committee here. A couple of points in his testimony are particularly worthy of comment.
Carney repeated a view he expressed loudly late in 2012, that Canadian companies sitting on piles of "dead cash", rather than investing it, are holding back the economy. This is certainly true -- indeed, growing piles of cash on corporate balance sheets are in effect a mirror image of government deficits: if companies would invest in more productive capacity and thereby generate more economic activity, government finances would quickly improve.
Carney notes that the increase in business investment in the current cycle is in line with past periods of recovery from recession, but he wants companies to do more because "we're not in average circumstances". Indeed we're not, but it's those differences from the average that explain why the current cash hoarding propensity of corporations, frustrating as it may be for policymakers, is very far from irrational behaviour.
Companies saw how quickly financing dried up when the financial crisis hit. They know that banks are still trying to rebuild their balance sheets. And they know that the entire financial sector is still facing the possibility of more draconian regulation, though this is admittedly much less of a concern in Canada than in the rest of the developed world. They also know, if only by dint of constant reminders in the media and from policymakers, that the economic recovery remains a fragile thing. Companies therefore fear that at any time, they may find themselves facing another sudden fall in revenues, and they know they may not be able to rely on banks to provide financial assistance to see them through. In these circumstances, hoarding your cashflow is the smart thing to do, and it's a behaviour that's unlikely to be altered by blasts from the Carney bully pulpit.
Carney also suggested some contrasts between the situation in Canada and the one he will be facing in the UK after mid-year:
“Here in Canada we are in a very different position than that in the United Kingdom,” Carney explained. “We don’t have large public and private indebtedness, we are not at zero (interest rates), we don’t have the problems in the financial sector that exist over there.”
It's true enough that the Canadian fiscal situation is better than the disaster unfolding in the UK, for all the concerns currently being heard out of Ottawa, Toronto, Edmonton and elsewhere. On the question of private indebtedness, however, things are less clear cut. Households' debt to annual income ratio recently hit a record of more than 160%, in line with the levels seen in the US just before the financial crisis hit. Historically low interest rates have induced Canadians to continue borrowing, which has helped to sustain aggregate demand but is surely storing up problems for the future, specifically, that moment in the future when rates start to rise.
Carney told the MPs that he sees signs that Canadians are heeding his warnings about excessive debt, and as a result he expects the debt/income ratio to stabilise this year. It's not at all clear what signs he's seeing here. The proliferation of payday loan ads on radio and TV suggests that, far from reining themselves in, Canadians may be resorting to more desperate measures to keep feeding the great god of consumption. Finding a way to defuse the household debt bomb without undermining the entire economy will be one of the biggest challenges for Carney's successor at the Bank of Canada.
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