paul jenkins : global economic trends - implications for canada remarks by mr paul jenkins, senior deputy governor of the bank of canada, to the saint john board of trade, new brunswick, 1 february 2006. * * * thank you for the opportunity to speak to you today — i am delighted to be here. i would also like to thank gilles lepage, the bank's director from new brunswick, for joining me. wherever one lives in canada these days, one cannot help but be aware that the world around us has been changing rapidly. because canada is so open to world trade and finance, we need to understand these changes so that we can manage our economy appropriately and take advantage of new opportunities. world economic growth has been remarkably strong over the past three years, averaging close to 4 1 / 4 per cent, and it is expected to stay around 4 per cent this year and next. but despite this solid overall performance, several interconnected global trends pose major challenges for the canadian and new brunswick economies. first, we have been witnessing large and growing global imbalances. most important for canada, the united states is running a very large deficit on its external current account ( that is, the balance of trade in goods, services, and investment income with the rest of the world ). the flip side of this deficit shows up primarily in asia, where there are large current account surpluses and a massive accumulation of foreign exchange reserves. second, we are seeing the emergence of china and india as economic powerhouses and formidable global competitors. third, there is a divergence in economic performance across world regions, with north america and the emerging economies of asia outperforming europe and japan. what are the implications of these trends for canada and for new brunswick? this is what i would like to discuss today. let me begin by reviewing these global trends in greater detail. recent global economic trends the u. s. current account deficit has widened — by about us $ 300 billion since 2002 — to us $ 785 billion, or 6 1 / 2 per cent of that country's gross domestic product ( gdp ). and the level of u. s. indebtedness to the rest of the world has more than doubled over the past five years to more than 25 per cent of its gdp. asia has been the primary source of foreign savings flowing into the united states. moreover, asian countries have accumulated over us $ 2 trillion in foreign exchange reserves, with china alone holding us $ 820 billion

to a given shock. for example, a relatively modest downward revision to expected spending may raise more questions about returns on equity than on corporate debt. alternatively, markets may be reacting to different shocks, or to changes to the capital structure of firms ; over the last few years, lengthening debt maturities and increases in liquid asset holdings may have supported debt holders at the expense of equity holders. or, as in the 1950s, perceptions may shift as a consequence of recent events. from time to time, risk premiums also may be affected by changes in demand and supply driven by legal or regulatory requirements, by exogenous changes in issuance patterns, or by shifting asset preferences for reasons unrelated to changing expectations or attitudes toward risk. to repeat, divergences in risk premiums are not necessarily unusual if looked at from a historical perspective. and surely different co - movements can reflect different risks - - or risk shifts - - and different preferences - - or preference shifts - - which can change the equilibrium relation across markets. but an understanding of what caused the divergent movements could be important for policymakers. for example, changes in perceived risk in some specific markets might point to certain economic weaknesses that policy may need to address. on the other hand, a shift in asset preferences that raised premiums in some markets but lowered them in others could potentially leave overall financial conditions, and their implications for spending, not much changed. thus, it is important for policymakers to look at risk premiums in their entirety, rather than in isolation, before reaching policy conclusions. today i have mostly characterized policymakers as avid readers of risk perceptions across markets, but our actions could affect risk premiums as well. for instance, an effective monetary policy may well have been one factor in the great moderation of inflation and business cycles that i mentioned earlier. and our efforts in recent years to make the policymaking process more transparent may, almost by definition, have reduced uncertainty and thus compressed risk premiums. we have emphasized the conditional nature of our discussions of future policy to help market participants calibrate their assessments and price risk. to the extent that the decline in risk premiums induced by clearer policy communication has accurately reflected the decrease in uncertainty, assets will be better priced. finally, some have asserted that our accommodative policy stance in recent years, made necessary by the macroeconomic situation, itself has tended to drive down risk premiums as investors " reached for yield. " notably, however, most risk