Global Debt Crisis still Threatening Canada

Bank of Canada Governor Mark Carney warns that Canada’s fiscal advantage will only go so far in protecting the country against a debt crisis growing in the world’s advanced nations and Asia’s emerging economic powerhouse.

Carney explained the Canadian Club Ottawa on Monday that the world is in the midst of a major economic power shift and governments must prepare themselves by getting their fiscal houses in order.

Carney continued to note that sustainable fiscal adjustment is now required in most advanced economies. Debt to GDP (gross domestic product) in G7 countries is now the highest since the Second World War.

As it stands, the issue of debt in Europe and increasing in the United States has become a key challenge for the global economy for both long and short terms.

Just last week we saw Finance Minister Jim Flaherty take his concern about the U.S. debt situation to Washington, which happens that there are direct implications for Canada on everything from exports, to interest rates to the value of the Canadian dollar.

Carney has explained that from experience, when debt exceeds 90% of GDP, economic growth will slow and that is the current situation that most of Canada’s major trading partners are facing, particularly in the U.S.

How is Canada’s situation in comparison?

With what Canada’s major trading partners are currently facing, the question lies in what position is Canada in?

Canada is among one of the few advanced economies that is not this position. Debt to GDP is projected to start falling as both Ottawa and the provinces move to balanced budgets.

With fiscal slippage in some major companies, we may see an increase in interest rates for all. What worries me is that fact that is growth in the U.S. and Europe is slowed down, then we will once again see Canadian exports suffer.

Carney did not give any new information concerning his own long term plans for interest rates in Canada, which suggested that there may not be a hike in the policy rate.

With that all said and done, the transformation in the world has presented an opportunity for Canadians, as ¾ of the growth is coming from emerging markets. Carney explained that despite this, the corporate sector has yet to take full advantage of this.

Carney finished off by explaining that Canadian businesses need to improve their competitiveness, source new suppliers and prepare to manage in a far more volatile environment as increasing market share in emerging markets will require sustained efforts in order to develop trade and both technical and academic partnerships.

image source: World Economic Forum