Carney and Flaherty Still See Canada Growth After Stall in Second Quarter

Bank of Canada Governor Mark Carney told lawmakers the Canadian economy stalled or shrank last quarter, sharing with Finance Minister Jim Flaherty the view that growth will rebound without further government stimulus.

“Recent Canadian data has been consistent with minimal to slightly negative growth in the second quarter,” Carney said today in Ottawa, compared with his July 20 forecast that gross domestic product grew at a 1.5 percent annual pace from April through June. “The Bank continues to expect that growth will accelerate in the second half of the year, led by business investment and household expenditures.”

Flaherty said strains in the U.S. and Europe haven’t derailed his fiscal projections for this year or a plan to balance the budget by the fiscal year beginning April 2014, adding that major new spending plans would be “precisely the wrong direction” for Canada to go.

Canadian government bond yields reached record lows this week and investors canceled bets that Carney would raise his policy interest rate from 1 percent on signs that slower European and U.S. growth will curb exports. Carney and Flaherty spoke to a special session of the House of Commons Finance Committee called after the U.S. lost its top credit rating and Europe’s sovereign debt crisis deepened.

‘Much Tamer Rebound’

Monetary policy and fiscal policy can work together right now in a way that it can’t in the U.S. and that keeps us optimistic” about Canada’s recovery, said Stefane Marion, chief economist at National Bank Financial Group in Montreal. “It will be a much tamer rebound” because of events abroad, said Marion, who predicts Carney won’t raise interest rates until mid-2012.

The Canadian dollar rose 0.5 percent to 98.56 cents versus the U.S. currency at 12:33 p.m. in Toronto, compared with 99.05 cents yesterday, when it touched 99.39 cents, the weakest level since Aug. 11. One Canadian dollar buys $1.0146. Bond prices were modestly lower, with the yield on the benchmark 10-year government bond rising 1 basis point to 2.31 percent, after hitting a record low 2.25 percent yesterday.

While Flaherty didn’t give an estimate for second-quarter economic growth, he said that strong business investment is needed for a “sustainable” recovery.

Investments by companies that have reported earnings since July 11 rose 22 percent in the latest quarter from a year earlier, down from a 34 percent year-over-year rate the previous quarter, according to data compiled by Bloomberg News.

Spending Plans

Calgary-based Suncor Energy Inc. (SU), the country’s largest energy company, plans to spend C$6.7 billion on investments this year, up from C$5.8 billion in 2010, while Canadian Natural Resources Ltd., the second-largest and also based in Calgary, plans as much as C$6.6 billion of spending, up from C$5.3 billion last year, according to Bloomberg data.

Governments in the U.S. and Europe “will require difficult and bold action,” Flaherty said, “to instill confidence in a prolonged recovery.” Recent European calls for a tax on financial transactions are a distraction from the need to balance budgets and “Canada will continue to oppose” the idea, Flaherty said.

Opposition members of Parliament focused their questions on the need for new stimulus spending in Canada. Scott Brison of the Liberal Party asked if Flaherty had a plan should the global economy keep worsening and New Democratic Party lawmakers asked if new spending on public works projects is needed now to create jobs.

“We should at least lay out for Canadians the possibility of recession in the U.S. and Europe, and lay out what the plan for Canada would be in the event of that recession,” Brison told reporters after the hearing.

No ‘Draconian’ Cuts

While rejecting major new spending plans, Flaherty told lawmakers he won’t make “draconian” spending cuts.

“If we were to see the situation globally deteriorate in a dramatic way, we would obviously do what is needed to protect our jobs and economy and families in Canada,” Flaherty said.

Carney said the central bank continues to expect the U.S. and European economies to keep growing. He didn’t say directly if or when he would change the bank’s policy lending rate.

Carney said “several downside risks” have been realized since his July 19 decision to keep the bank’s main lending rate at 1 percent, including a deepening of Europe’s sovereign debt crisis and “the persistent strength of the Canadian dollar.”

There are a “wide range of tools” available to support growth and ensure market liquidity if needed, Carney said, adding that the bank will also “take the necessary steps to ensure that core funding markets remain liquid.”

To contact the reporters on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net; Andrew Mayeda in Ottawa at amayeda@bloomberg.net.

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net; David Scanlan at dscanlan@bloomberg.net.

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