OTTAWA – Bank of Canada governor Mark Carney is warning that the Canadian economy would be damaged by a global currency war and that it would do little good to join the manipulators in trying to boost exports.
The outgoing bank governor made the comments Tuesday to a Canadian parliamentary committee after he and Finance Minister Jim Flaherty signed a Group of Seven statement denouncing exchange rate manipulation.
The statement, issued in advance of the G20 meeting in Moscow later this week, urges nations to set monetary policy to suit domestic conditions, not in an effort to lower the level of their currencies and gain a competitive advantage in export markets.
The statement appeared centred on complaints about Japan, the world’s third largest economy, which set in motion a series of policy actions that have contributed to a 15 per cent devaluation in the yen against the U.S. dollar over the past three months.
The U.S. and Europe have also maintained accommodating monetary policies, although Carney called them appropriate, given the circumstances in those economies.
But Carney acknowledged that Canadian exports are a key reason why the economy remains weak and that the strong loonie has not helped. He estimated the appreciation of the currency over the past decade or so was responsible for two-thirds of the loss in Canadian competitiveness.
“If we were to try to control the level of our exchange rate, we would have to start to close what is one of the most open and effective capital markets, money markets, in the world, in order to be successful,” he said.
“And secondly, there would be undoubtedly be a suspicion we weren’t trying to move the exchange rate to equilibrium level but we were trying to gain a competitive advantage.”
Carney said it was “extremely important” that the G7 follow the rules and that emerging nations in the G20, such as China, also move to flexible currencies.
A government official speaking on background said global economies are in the process of rebalancing, so some exchange range adjustment is natural. But the G7 wanted to reaffirm that the adjustment that occurs doesn’t involve governments trying to create a trading advantage by targeting a lower exchange rate.
Policy-makers are concerned that if nations suspect their trading partners are manipulating currencies, they may engage in a tit-for-tat response, and touch off a wider currency war that hits the world trading system.
Carney says a free-floating currency is essential to market economies, acting to absorb shocks. If the currency is fixed, the economy would need to adjust in other ways, specifically through lower real wages for workers
“That is a much more difficult adjustment,” he said. “This is part of the challenge a number of eurozone are having now, that is extremely difficult and socially destructive.”
The central banker also put some of the blame for Canada’s weaker-than-expected economy in the second half of 2012 to the spread between what eastern Canadians pay for imported oil and what Western producers receive when they ship to the U.S. The spread has risen to as high as $50 a barrel— a record.
Flaherty recently said the low value received by Western producers has also reduced government revenues, impacting their bottom line.
But Carney said the cause had nothing to do with the drive in the U.S. for energy self-sufficiency. Instead, he said the fault lies in insufficient infrastructure to handle production.
“This is ultimately an issue of pipeline and refining capacity,” he said. “It is not our view that this is an issue of deficient U.S. demand. We see the possibility of American energy security in a few decades, but that’s in a North American context, that includes a substantial increase in exports of Canadian crude to the U.S. market.”
He added that Canada would be in a more advantageous position in terms of demanding higher prices if it were to diversify its markets, a nod to the controversial proposal to build a pipeline to the British Columbia coast in order to sell oil to China.
More generally, Carney said he believes the weakness in the Canadian economy during the latter half of last year was partly due to temporary factors.
Although the final data is not in, the Canadian economy grew only about 0.6 per cent in the third quarter and likely only by about one per cent in the last three months of 2012. That’s about one third what the central bank had anticipated earlier in the year.
But Carney said there had been some positive developments in the past few months as well. External risks are diminishing in Europe and the U.S. economy appears poised for a rebound, particularly in areas that will help the Canada — consumer spending and housing, he said.
But while the export sector may pick up, the Canadian domestic economy is losing steam, particularly in the housing sector, he said, adding that is the reason he believes interest rates will need to stay low for a long time.
For the economy to grow as the Bank of Canada anticipates — by two per cent this year and 2.7 per cent next year —Carney said exports must return to pre-recession levels and business investment must expand.
On the latter front, Carney said he’s disappointed that investment fell off late last year.
The governor took some flack from corporate Canada in 2012 for urging firms to put “dead money” they had stored up to use, but Tuesday he said he was taking nothing back. Asked about the current situation, he said investment levels remain lower than they should be given the strong dollar, which makes purchases of foreign machinery and equipment less expensive, and the “productivity deficit.”
Carney was also pulled in on the issue of Canada’s employment record by NDP and Conservative members who wanted the governor to back their version of reality.
The governor tread a middle ground, acknowledging that Canada’s job creation record has been the best in the G7, but also that there remained “considerable slack” in the labour market.
He noted the unemployment rate at seven per cent is higher than pre-recession levels and that long-term joblessness — those unemployed for six months or longer — is at about 20 per cent, also an elevated level. But he said some of the problem stems from a mismatch in the market, whereby those unemployed don’t have the credentials for the jobs being sought, or are unable to relocate to where the jobs are.