Sluggishness in Canada’s economy may be explained by forces that are restraining inflation and business investment worldwide, a central bank official said.
U.S. and euro zone economies have experienced disinflation that’s hard to explain, and international research also suggests that companies are holding back on spending because of uncertainty about global growth, Bank of Canada Deputy Governor John Murray said today in the text of a speech he’s giving in British Columbia capital of Victoria.
“Economic developments in Canada are often surprisingly similar to those observed in other countries,” Murray said. “The similarity is also driven in many cases by more general global forces that are affecting several economies simultaneously, and that manifest themselves in Canada even when there are no obvious direct trade or investment links.”
Canada missed the worst effects of the 2008 global financial crisis as banks avoided collapse and low interest rates and government stimulus boosted consumer spending. The Bank of Canada yesterday held its key interest rate at 1 percent, saying policy makers are balancing risks of record consumer debts through a housing boom against weak exports and inflation.
International experience suggests the relationship between spare capacity in the economy and “inflation is subject to a much longer lag than previously thought and that, to have an effect, the gaps must be not just large, but persistent,” Murray said. “The sensitivity of prices to excess supply might increase through time.”
Canada’s slow export recovery can’t be explained just by the country’s currency or a loss of competitiveness, Murray said. New research suggests threats of a U.S. federal shutdown have curbed shipments, he said, with about 12 percent of Canadian non-commodity exports going to the U.S. government.
On investment, companies worldwide are hoarding cash because of uncertainty about global demand, Murray said. There are recent signs that U.S. “investment activity will accelerate in the near future,” he said.
Canada’s housing market, by contrast, is slowing after a period of strong gains, Murray said.
Australia has avoided a housing bubble even with consumer debt burdens higher than those in Canada, in contrast to the U.S. and U.K. where there have been crashes, he said.
“Although countries such as the United States and the United Kingdom have experienced sharp and painful corrections at comparable debt and price levels, leading to much more serious economic and financial consequences, it would be a mistake to assume that a similar outcome is therefore inevitable in Canada,” Murray said.
Policy makers should still avoid any steps that would further boost the housing market, he said.
“The household sector is now largely played out; pushing it much further could lead to trouble,” Murray said.
Today’s speech by Murray, 65, is his last public address before his retirement at the end of April.
Murray started at the central bank in 1980 and joined the panel that sets interest rates in January 2008. The Toronto native has a doctoral degree in economics from Princeton University.
Around the same time as Murray, Senior Deputy Governor Tiff Macklem is also leaving the bank to head the business school at the University of Toronto.