Mark Carney: Fortune favours the bold
Remarks by Mr Mark Carney, Governor of the Bank of Canada, to the Greater Charlottetown
Area Chamber of Commerce, Charlottetown, Prince Edward Island, 16 June 2010.
The original speech, which contains various links to the documents mentioned, can be found on the US Federal
Reserve System's website.
* * *
It is a pleasure to be here. In this birthplace of Confederation, courageous decisions were
made here to found our great nation. Similar boldness, both in Canada and globally, is again
required.
To explain why, I would like to touch upon the recent past, the present outlook, and our
challenging future.
The recent past: the recession in context
From the end of 2008 to the middle of last year, Canada experienced a short, sharp
recession. With the exception of government spending, all major components of aggregate
demand declined, and industrial production dropped 15 per cent. Canadian exporters
suffered particularly, owing to the sharp fall in the components of U.S. economic activity that
matter most for Canada. For example, U.S. demand for motor vehicles fell by more than half
and housing starts by two-thirds. Partly as a result, several major Canadian industries are
now undergoing deep restructurings.
The recession had a considerable impact on employment. Some 400,000 Canadians lost
their jobs, and our unemployment rate spiked by almost 3 percentage points to its highest
level in more than a decade. Although the labour market is clearly improving, with
threequarters of the jobs lost now recovered, too many Canadians who want to work are still out of
a job, and many of those still employed are working fewer hours than they would like (see
Appendix Chart 1).
As painful as our recession was, Canada suffered less than most other advanced
economies. Consumption, housing, and employment in Canada all held up substantially
better than in the United States. The cumulative fall in Canadian real GDP of 3.3 per cent
compares with declines of 3.6 in the United States, about 5 per cent in the euro area, and
more than 8 per cent in Japan.
Canada's better performance can be explained by two factors. First, with a highly credible
monetary policy and the strongest fiscal position in the G-7, Canadian policy-makers were
able to respond swiftly and effectively with extraordinarily accommodative measures. The
Bank of Canada began cutting interest rates in December 2007 and pursued an aggressive
series of reductions until our policy rate reached one-quarter of one per cent in April of last
year, the lowest it can effectively go. The Bank then provided exceptional guidance on the
likely path of interest rates necessary to achieve the inflation target in order to maximize the
monetary stimulus from its actions.
Second, Canada entered the recession with notable advantages, including a well-functioning
financial system, strong corporate balance sheets, and relatively healthy household finances.
We will have to draw on these advantages during the recovery. While the global downturn
was synchronous, economic performance across markets and sectors is likely to be
increasingly uneven. For some Canadian businesses, the recovery may prove as challenging
as the downturn.
Do not be misled. This was the Great Recession. To claim otherwise with simplistic
comparisons to prior downturns is to ignore both the rapidity and the scale of the policy
response, as well as the likelihood that the aftershocks from the crisis will persist for years.1
In particular, the Bank expects that:
 the pace, composition, and variability of global growth will be substantially different
across economies;
 the level and volatility of commodity prices will be higher;

the nature of the global financial system will be radically altered; and

the openness of global markets for goods and capital can no longer be assured.
Canada is not a bystander in this global upheaval. We can influence policies and focus
reforms. Our businesses can anticipate and take advantage of emerging trends. But the
efforts required of all of us will be heroic, and hesitation will be costly.
For both policy-makers and businesses at this juncture, Virgil's adage applies: fortune
favours the bold.
The present
The current economic outlook is neither as robust as recent data indicate nor as dire as
current headlines scream.
The global economic recovery is proceeding, but it is increasingly uneven across countries.
There is strong momentum in emerging-market economies; some consolidation of the
recoveries in the United States, Japan, and other industrialized economies; and the
possibility of renewed weakness in Europe.
Global growth is now projected to average slightly above 4 per cent a year through 2012.
Few, apart from the Bank of Canada, thought that possible at this time last year. The Bank
continues to hold the view that, led by domestic demand, Canadian growth will likely be the
strongest among the G-7 nations over the next two years.
Recent activity in Canada is unfolding largely as expected. The economy grew by a robust
6.1 per cent in the first quarter, led by housing and consumer spending. Employment growth
has resumed. Household spending is expected to decelerate to a pace more consistent with
income growth. The anticipated pickup in business investment will be important for a more
balanced recovery.
This outlook is subject to considerable uncertainties. In most advanced economies, the
recovery remains heavily dependent on monetary and fiscal stimulus. The required
rebalancing of global growth has not yet materialized. In general, broad forces of household,
bank, and sovereign deleveraging have barely begun and will add to the variability, and
temper the pace, of global growth as they proceed.
Recent tensions in Europe are likely to result in higher borrowing costs and more rapid
tightening of fiscal policy in advanced economies. As I will discuss shortly, without
countervailing policies, this could lead to a more protracted recovery.
Nothing is easy
The reality of a policy-led, multi-speed recovery is that the global economy is now bumping
up against three limits.
The first is the supply response in commodities. With emerging-market economies' share of
global growth now two-thirds, rather than the one-half it was at the start of the millennium,
global growth is more commodity-intensive. In our April forecast, the Bank projected an
additional 30 per cent increase in the prices of non-energy commodities over the next few
years.
The second limit relates to the challenges of derivative monetary policy. Owing to managed
exchange rates, many emerging-market economies are acting as if U.S. monetary policy
were appropriate to their circumstances. Despite strong capital inflows, these countries are
resorting to a series of measures of unproven effectiveness to address overheating
pressures. Capital controls, restrictions on loan-to-value ratios on mortgages, and higher
reserve requirements are all stop-gap measures in the face of broader forces.
While these measures will have some impact, ultimately, there are only two possibilities in
emerging-market economies: either higher interest rates or higher inflation.
The third limit is fiscal stimulus. Reflecting the massive fiscal response and the recession, the
International Monetary Fund projects that advanced economy debt will rise from about 80 per
cent of GDP in 2008 to 110 per cent by 2015.
Major efforts will be required to stabilize the situation. The canary in the coal mine, Greece,
faces one of the largest primary adjustments ever undertaken. Moreover, as with other
European countries, Greece cannot expect to benefit from lower interest rates, depreciation,
or export growth to facilitate adjustment. It will require significant wage reductions and
productivity enhancements to restore competitiveness and growth.
The possible responses of other countries to the situation are denial or conviction. In the
former case, growing public debt will push up global interest rates, crowding out private
investment and lowering potential growth.2
Given the scale of the fiscal challenge, it is perhaps not surprising that some eminent
economists are looking for an "easier" way out. This form of denial is to allow temporarily
higher inflation in order to inflate away public debt.
To the Bank, this is a siren call.
Those most in need of fiscal consolidation are often those with debt portfolios of the shortest
duration. The "surprise" would have to be very sudden and very large to have a material
impact. Of course, if temporary inflation becomes built into expectations, real rates may well
increase, rather than fall, thereby exacerbating debt dynamics. Moreover, in the past, it has
proven devilishly hard to keep inflation high temporarily. Would it be credible to have a
oneoff increase in the inflation target?
Central banks have worked for decades to get inflation down to levels consistent with price
stability. We should not risk these hard-won gains.
The second, more positive, and more likely, response to the fiscal challenge is conviction.
We have seen that conviction in recent weeks. The European financial stabilization plan,
announced in May, is a bold step towards accelerated fiscal consolidation. The plan has
been followed by a series of concrete actions. Spain announced measures totalling 1.5 per
cent of GDP in additional fiscal consolidation, while Portugal introduced consolidation
measures amounting to 1 per cent of GDP for 2010. Greece has passed the key elements of
its austerity package, and the United Kingdom is planning for an early and tough budget.
Similar measures are likely in other countries in the coming weeks.
However, the coming "Age of Austerity" carries its own risks. Fiscal policy that is tighter,
sooner for all could create deficient demand in the global economy. The Bank of Canada
estimates that, in the absence of real exchange rate adjustment and higher domestic
demand elsewhere, the shortfall in global GDP could reach $7 trillion by 2015.3
To recoup this enormous sum, both the public and private sectors must be bold.
Public boldness: the G-20 agenda
At the Pittsburgh summit last September, the G-20 claimed that "It worked." Well, it isn't over.
The G-20's agenda is comprehensive and radical, but we need to implement, as well as
propose.
As a consequence, Canada's priorities for the upcoming G-20 Leaders Summit are:

To make concrete the G-20 framework for "strong, sustainable, and balanced
growth." This stresses the shared responsibility of countries to make up that
$7 trillion shortfall I just highlighted.

This will require changes in behaviour and policy adjustments on several fronts,
including:
- sustained and credible fiscal consolidation in the advanced countries;
- structural and financial reforms that will increase domestic demand in major
emerging-market economies;
- increased real exchange rate flexibility in emerging-market economies to
facilitate the adjustment from external demand to domestic demand; and
- structural reforms to enhance productivity and potential growth in advanced
economies.

To move forward on the core G-20 financial reform agenda. There are two main
approaches to reform: to protect the banks from the cycle and to protect the cycle
from the banks. Both are necessary.
- Protecting the banks from the economic cycle means making each bank,
individually, more resilient. This will require more capital, higher liquidity, and
better risk management, complemented by stronger supervision. While there
is still much to be done, in general, these types of measures will make global
financial institutions look more like their Canadian peers.
- Protecting the cycle from the banks means making the system as a whole
more resilient. This requires building a system that can withstand the failure of
any single financial institution. These measures (including contingent capital,
better infrastructure for key markets, and new resolution authorities) are new
and will change how our financial system operates.4

Finally, to ensure that business can operate, as much as possible, in an open and
stable trade and regulatory environment. We must live up to the G-20 commitment
to resist trade and financial protectionism.
Private boldness: thriving in a multi-polar economy
And what of private boldness? With so much uncertainty, isn't now the time for corporate
caution?
Waiting on the sidelines ignores both the scale of the challenge and the opportunities
presented by both our historic underperformance and the transformation of the global
economy.
We should recognise that Canada is not as productive as it could be. Our productivity
ranking has dropped from third of the 20 countries in the Organisation for Economic
Co-operation and Development (OECD) in 1960 to 15th of the current 30 members.5 After
some promising signs in the late 1990s, average labour productivity growth has since slowed
dramatically.
A small part of this could be due to measurement errors (which will be corrected over time)
and a bit more reflects lags associated with the economy's adjustment process, but most of
this yawning gap between us and our peers reflects fundamental shortcomings. Addressing
these will require more concerted efforts on the part of business and government since:

Canada underinvests in machinery and equipment (M&E), training, and innovation -
in fact, all of the underlying drivers of productivity.

Canadian workers have about half the amount of information and communications
technology of their American counterparts.

Canada is 16th among the member countries of the OECD in the intensity of
business research and development.

Even when we do invest, we are mediocre. Our poor multifactor productivity growth
indicates that Canadian firms do not effectively use the capital that they purchase.
In general, while there is more to do, governments have put in place many of the conditions
for a productivity revival. Our tax competitiveness has improved dramatically. Comparatively,
Canada invests the largest proportion of GDP in primary research. Tariffs on
machinery-andequipment investment are being eliminated, and we have sound macro policies and
generally effective regulation. Governments will need to maintain the reform momentum, but
they cannot be expected to will individuals and companies to take risks.
Business will need to step up. Productivity growth fell in the latest recession, the first time
this has happened in three decades. Despite the availability of capital, relatively strong
balance sheets, and improving economic conditions, business investment has been subdued
compared with past downturns and the scale of the challenge (see Chart 2). Investment
intentions for 2010 remain modest and largely driven by the public sector.
This needs to change for a balanced recovery and a more competitive economy.
This is not just a challenge for our largest corporations. Our small- and medium-sized
enterprises are, in many respects, the engines of our economy. The rapidly changing global
economy will mean that more, too, will be asked of them.
The imperatives for Canadian businesses appear clear. New suppliers need to be sourced;
new markets opened; a new approach to managing for a more volatile environment
developed.
The relatively slow recovery expected in our most important trading partner, along with
ongoing sectoral adjustments, means that Canadian firms have to find new markets. The
global economy is increasingly multi-polar. Emerging-market economies currently account for
about two-thirds of global growth. They represent almost one-half of the growth in imports
over the past decade, particularly of capital goods. They are the main drivers of commodity
prices and are therefore important determinants of our terms of trade. More fundamentally,
they are increasingly thought to be leaders and innovators in public policy and business.6
Canada needs to become fully engaged with these emerging centres of economic power.
Monetary policy going forward
In the wake of the shock of the global financial crisis, the Bank of Canada was aggressive.
We engaged in a series of innovative, coordinated actions with G-10 central banks; we
slashed interest rates to their lowest possible levels; and we then provided unprecedented
transparency on their likely future path through our conditional commitment.
All of these actions were necessary for the Bank to fulfill its mandate to achieve its inflation
target of 2 per cent CPI inflation.
A more subtle approach is now warranted. The Bank must balance the competing influences
on Canadian activity and inflation of momentum in domestic demand and the increasingly
uneven global recovery.
In recent months, as the need for emergency settings of monetary policy was passing, the
Bank gradually reduced the degree of monetary stimulus. In April, we ended our conditional
commitment, which in itself represented a tightening of monetary conditions.7 At the start of
this month, the Bank raised its target overnight rate to 50 basis points and re-established the
normal functioning of the overnight market.
These decisions leave considerable monetary stimulus still in place, consistent with the large
degree of excess supply in Canada, the strength of Canadian spending, and the uneven
global recovery.
Given the ongoing uncertainty surrounding the outlook, any further reduction of monetary
stimulus would have to be weighed carefully against domestic and global developments.
In light of the scale and volatility of these conflicting forces, it should be evident that no
particular path for monetary policy is preordained.
Conclusion
In conclusion, now is not the time to rest on our laurels. Public and private boldness, both at
home and abroad, will be required to secure the recovery. This means G-20 action to reform
the global financial system and to secure a sustainable recovery. This means investments by
our businesses to improve productivity and to gain new markets. This means Canadians
should fully engage the new multi-polar global economy.
These are all big decisions. How quickly and how effectively they are taken will influence
activity and inflation in Canada and, therefore, the stance of monetary policy. The Bank will
need to be agile.
The Bank will maintain its unwavering commitment to price stability. The single, most direct
contribution that monetary policy can make to sound economic performance is to provide
Canadians with confidence that their money will retain its purchasing power. Price stability
lowers uncertainty, minimizes the costs of inflation, reduces the cost of capital, and creates
an environment in which households and firms can invest and plan for the future.
Appendix
BIS Review 83/2010