Mark Carney is wrapping up his tenure at the Bank of Canada and preparing to take over at the Bank of England at mid-year. This week, Carney's BoC yet again lowered its growth forecasts for the Canadian economy and indicated that it would keep interest rates at rock-bottom levels (its cash rate target is 1%) at least until 2014. That done, Carney gave an online interview to Thomson Reuters that gives some interesting insights into how he sees the Canadian economy, and raises some important questions about how he will fare in the UK. A summary of the key points by Reuters can be found here, while the Toronto Star's coverage is here. It's the latter article that's the more interesting of the two.
I don't think it's reading too much into Carney's comments to say that as he takes his leave of Ottawa, he's perplexed by two things: the continued willingness of Canadian households to take on more debt, and the reluctance of cash-rich Canadian companies to invest. His perplexity is a bit surprising, and may raise concerns about how things will pan out once he gets settled in at Threadneedle Street. Let's look at these two issues in turn.
Carney has been warning for some time that if households don't curb their borrowing, the Bank of Canada may be forced to start raising interest rates. It's hard not to see this as a hollow threat. Carney knows only too well that if he actually started to raise rates, a lot of Canadians -- and the entire Canadian economy -- would be in very deep water very quickly. Raising rates is not really an option, so he's hoping that the threat alone will get people to straighten up. The data suggest this is working, but not quickly enough for the Bank's liking.
The odd part for me, though, is that it's working at all. Canadians were fervid borrowers before the financial crisis hit. If you then offer them unprecedentedly low interest rates on those borrowings, can you really expect them to borrow less? It would be a violation of economic logic and of human nature if they did.
And what about Canadian corporations, who are sitting on piles of cash, which Carney last year dubbed "dead money" -- in common, of course, with corporations in the US and elsewhere in the world. Carney wants them to invest it, but why would they? I wrote in my previous posting that the fact that central banks are maintaining near zero interest rates and continuing with money creation is a clear sign that they lack confidence in the economy. If that's so, why would companies feel any different?
Or look at it this way. If we really are looking at a future of low growth and low inflation, corporate investment decisions have to be exceptionally well thought-out. There's no prospect of getting skated onside by a burst of inflation or a buoyant economy. Who can have that kind of confidence, or animal spirits, right now? It's particularly surprising to read, in the Star article, that Carney sees the availability of cheap credit as one of the factors that should get Canadian companies to start investing again, which seems to undermine his concerns about all that "dead money".
If I can see these things, it's impossible to imagine that Mark Carney can't see them too. The big difference* is, of course, that nobody is looking to me to solve these conundrums. But they are looking to Carney, and it's revealing to discover that he has little to offer by way of a solution beyond words of persuasion. It's tempting to conclude that Canada's success in avoiding getting dragged into the worst of the financial crisis owes less to Carney's credentials as "the greatest central banker of his generation", and more to the proclivity of Canadian finance ministers, of every party, to intervene in the banking system whenever they see something they don't like. The bankers may hate it, but it's proved to be no bad thing.
Anyway, it's off to London for the Carneys. The problems he will face there, aside from his wife's well-publicized difficulties in finding a house, will bear a lot of resemblance to those he leaves behind. Consumers are over-indebted. The top end of the housing market has become untethered from reality. The manufacturing sector is in a funk, battered by lagging demand among key trading partners and an arguably overvalued exchange rate.
It will be interesting to see whether Carney's approach to these issues differs from the one he took in Canada, which was basically to hope that cheap money would cure all the world's ills. One intriguing aspect that he may not have faced before is that the outright independence of the central bank's decision-making is a much more recent innovation in the UK than in Canada. It was only enshrined when Gordon Brown took over as Chancellor in the late 1990s. There are still a lot of influential politicians, including former Chancellor Kenneth Clark, who think that was a mistake. Even if voices such as Clark's continue to be largely ignored, Carney can expect to be under much closer and more critical scrutiny in London, from politicians and the media alike, than he has usually been in Ottawa. Word has it that he doesn't always take kindly to criticism. This promises to be fun to watch!
*Leaving aside the fact that I'm much taller, and he's much better paid.
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