##preciation is re - directed to freely floating currencies. as well, the stock - flow problem of investors looking to rebalance portfolios towards emerging markets could lead them to invest in proxies such as australia and canada. finally, the desire of major reserve holders to diversify their portfolios provides additional support. with financial market participants trying to ride these trends, volatility could become excessive. brics refers to brazil, russia, india, china and south africa. all else being equal, the imf estimates that a 10 per cent increase in oil prices, reduces u. s. growth by about 0. 2 to 0. 4 per cent. bis central bankers ’ speeches the imperative of macro stability in this environment, domestic macro stability is paramount. sustained fiscal adjustment is now required in most advanced economies. debt - to - gdp in g - 7 countries is now the highest since the second world war. the age of austerity is not a slogan but a timetable. the task is enormous ( chart 7 ). stabilizing debt will require increases in the primary balances of between 8 and 11 per cent of gdp for the united states, the united kingdom and spain. moreover, these forecasts assume that nominal interest rates will be roughly the same level as nominal growth rates. however, if markets begin to lose patience, higher rates will ensue and the required adjustment will be even larger. 10 canada is one of the few advanced economies on a path to avoid this outcome. however, despite this crucial advantage, we cannot fully insulate ourselves from the spillovers from others. fiscal slippage by some major countries may increase interest rates for all. moreover, experience suggests that when debt exceeds 90 per cent of gdp ( as it will for most of our trading partners ), growth slows, with predictable consequences for our exports. 11 in the extreme, if fiscal consolidation abroad is delayed too long, investors may even call into question the existence of a risk - free asset. this would have far - reaching consequences, including less - diversified portfolios, higher risk premia across asset classes and greater asset market volatility. 12 the resulting higher borrowing costs for individuals and firms would have broad - based implications for capital allocation and economic growth. 13 in the end, given these risks, all countries should follow the toronto g - 20 accord to halve their deficits by 2013 and stabilize their respective debt - to - gdp ratios by 2016. implications for monetary policy in canada

- commodity export market share in the brics has been almost halved over the past decade, activity in canada does not benefit to the same extent as in past commodity booms driven by u. s. growth. 8 the current situation is more akin to a supply shock for our dominant trading partner, with higher commodity prices acting as a net brake on growth. with oil prices up 50 per cent since last summer, the effect is material. 9 increasing market share in emerging markets will require sustained efforts to develop trade, technical and academic partnerships. in tandem, canadian business needs to improve its competitiveness, source new suppliers, and prepare to manage in a more volatile environment. changing capital flows the second consequence of the shifting global landscape is dramatic changes in the scale, composition and direction of capital flows. these dynamics will have important implications for returns for canadian investors, the cost of capital for our businesses, and the risks to our economy. given the expected growth differentials between emerging and advanced economies and the substantially underweight positions of most canadian investors, the opportunities appear substantial. however, it will be a crowded field in the short term. investors from advanced economies are substantially overweight in their home markets : advanced economies represent half of current global gdp, but their equity market capitalization is nearly three - quarters of the global capital market. a reallocation of 5 per cent of advanced - economy portfolios to emerging markets translates into a potential flow of $ 2 trillion, or 10 times portfolio equity flows to all emerging markets. unlike canada, which imported on average 8 per cent of gdp per year in the three decades before world war i, emerging markets are currently net capital exporters ( chart 6 ). in effect, there is a massive recycling operation under way : private capital flows from advanced to emerging economies are being more than offset by official outflows in the opposite direction. while emerging economies are having difficulties absorbing large private flows, advanced economies have often misallocated surges in yield - insensitive gross claims. in canada, as elsewhere, large capital inflows will require vigilance from public authorities and private financial institutions. financial history, particularly during times of large power shifts, is rife with examples of booms stoked by dumb money that turn good situations to bad. moreover, the current dynamics could have important effects on the exchange rates of countries like canada. with some countries managing their exchange rates and restricting capital inflows, pressure for u. s. - dollar de