Carney May Halt Rate Increases to Spur Investment Rather Than Consumption
Bank of Canada Governor Mark Carney wants to use low interest rates to stimulate growth -- just not too much growth through borrowing by debt-laden households.
Canada emerged from recession faster than other Group of Seven nations as consumers, spurred by low interest rates, boosted spending and added to record debts. Carney has lifted his policy rate three times since June to 1 percent, with the next announcement set for Oct 19.
Economists expect Carney will pause the tightening cycle after the U.S. Federal Reserve indicated it may add new stimulus, which may strengthen the Canadian dollar and hurt exports. Carney has used speeches and public appearances to warn consumers about borrowing too much, while urging businesses to make “bold moves” to increase productivity.
“The Bank of Canada is in a really tough position,” said Francis Fong, an economist with Toronto-Dominion Bank. With “the household indebtedness issue threatening consumer spending,” Fong said “the onus is now shifting to businesses to take advantage” of low interest rates.
The central bank said in July it’s relying on consumers to contribute about half of the 2.9 percent economic growth next year, while forecasting investment will add 0.7 percentage point to growth in 2011, up from 0.1 percentage point this year. Government spending will probably become a drag next year, the bank said, and Finance Minister Jim Flaherty has repeatedly said he plans to end stimulus spending in March.
Carney said in a Sept. 30 speech that companies have “disappointed” with investment plans and expects they will spend more to spur the economy. Business gross fixed investment was still 13 percent below the pre-recession peak in the second quarter, according to Statistics Canada.
The bank’s growth outlook will be updated on Oct. 20, and Carney has said he will cut the outlook for the second half of this year. Economists in a Bloomberg News survey predict growth of 2.5 percent in 2011, down from 3.1 percent this year.
Carney also warned consumers in that speech to make sure they aren’t overburdened after debt reached a record 146 percent of disposable income. Households have already run net financial deficits for nine straight years, instead of the surpluses they had from the 1960s through the 1990s, Carney said.
“Frankly it’s easier to make monetary policy in the U.S. right now -- it’s clear where they have to go with the next step,” said Glen Hodgson, chief economist at the Conference Board of Canada in Ottawa, a non-partisan research group. Carney “doesn’t want to be accused of choking off the recovery by raising rates too fast,” he said, adding “the danger is the illusion of low rates and people loading on debt and thinking they can finance it forever.”
The central bank’s third-quarter survey of executives found 46 percent of companies plan to increase machinery and equipment investment over the next 12 months, while 10 percent predicted less, the bank said Oct. 8. This was the widest gap since executives were first asked the question in 1998.
A separate central bank survey of senior lending officers found that overall credit conditions had eased, with more of the benefits going to larger companies.
“The recovery gets that much slower” if business lending lags, said Malcolm J. Jones, a portfolio manager at Adroit Investment Management Ltd. in Edmonton, Alberta, who oversees about C$350 million of fixed-income securities. He predicts the bank will say next week “we are vigilant, we are watching, we don’t need to raise rates this time.”
Some firms are struggling to get loans and others are reluctant to expand as global growth falters, said Jayson Myers, president of Canadian Manufacturers & Exporters, a lobby group. “If you had a choice between spending a million dollars in a new venture, product line or market versus taking that million dollars and saving it in case things don’t go well, right now I think a lot of companies would tend to save it,” he said.
Rona Inc., Canada’s largest home improvement retailer, doesn’t need new loans to finance its expansion plans, said Chief Financial Officer Claude Guevin. “Financing isn’t a problem and I’m sure it’s the case for many other companies,” he said in an Oct. 8 interview.
There are signs consumers are heeding Carney’s message. Consumer confidence fell “significantly” last month, according to an Oct. 1 Royal Bank of Canada survey that showed Canadians are worried about personal debt and global economic growth. Thirty-nine percent of those asked plan to spend less over the next year, and 51 percent want to reduce debt, the survey found.
Rona customers are holding back on some purchases because they are worried the global slowdown will spill into Canada, Guevin said.
Consumer stocks have lagged gains on Canada’s main exchange this month. The Standard & Poor’s/TSX’s consumer staples index has declined 0.08 percent and the consumer discretionary index has increased 0.73 percent, trailing the composite index’s gain of 2.03 percent.