OTTAWA - Bank of Canada governor Mark Carney is warning that Canada and the world are suffering through the worst economic downturn in half a century, but he's also cautioning against over-reaction by governments trying to fight the global recession.
"In the coming months, there may be pressure for policy to do more," he told a business audience in Yellowknife on Wednesday.
But such decisions need to be taken with an "eye to the scale of what has already been done" and that it takes time for fiscal and monetary stimulus to work, he added.
Carney said he will outline possible further economy-boosting measures to get more money into the financial system in three weeks, but he stressed that should not be interpreted as a signal the bank will go ahead with so-called quantitative easing.
That's a technical term for the central bank printing more money or buying bonds and other assets to pour billiona of additional dollars into the economy to free up credit markets and encourage companies to invest and expand and consumers to spend.
In a question and answer segment following the speech, Carney was more direct in his warnings, particularly to foreign governments meeting at the G20 conference in London.
"People need to be careful about doing too much, too soon, relative to their fiscal capacity," he said.
The comments come a day after the Organization for Economic Co-operation and Development suggested that governments, singling out Canada and Germany, should do more to try and arrest the worst economic meltdown since the Second World War.
And they appear at odds in tone to Prime Minister Stephen Harper's initial message to G20 leaders meeting in London that the dangers of under-reacting are greater than piling on too much stimulus, saying countries should in fact "overeact" to the crisis.
Economists say that while stimulus spending will help create jobs and ease the impact of recession, too much of it will lead to massive budget deficits and ignite inflationary pressures that could lead to higher interest rates and weaker growth in the future.
Carney, who has faced considerable grief and second-guessing for appearing to be relatively rosy in his last official forecast in January, took steps to get more in line with other forecasters in the speech, toning down his expectations of recovery.
The central bank governor now says there's no question the world economy is falling at the sharpest rate since the Second World War and is in the throes of a crisis in confidence.
Growth, when it comes, will be slow and muted as the world enters a period of clearing away years of spending excesses and the buildup of trillions of dollars of debt.
"It would appear likely that the global economy is entering a period of lower potential growth," he told the business audience.
Citing Japan's lost decade of the 1990s, Carney says it is apparent that "an economy cannot really have sustainable growth until past excesses have been worked off."
While most of these excesses occurred in the United States and Europe, Canada can not escape the consequences, says Carney.
That's because so much of the economy is based on exports of autos and lumber and on commodities such as grain, metals and oil and gas, which are in heavy demand only when the world economy is healthy and growing.
"The drop in our terms of trade since July will translate into a significant reduction in Canadian incomes and thus in our ability to sustain real domestic spending in the economy," he said.
BMO Capital Markets economist Douglas Porter said he believes Carney is "definitely trying to dampen down expectations" of a quick recovery from recession.
While he still expects Carney to lower the central bank's trendsetting interest rate another quarter point to a new record 0.25 per cent on April 21, he added that it's now an open question whether the governor will do more than what has already been done to boost growth.
Reading between the lines from the speech, Carney appears to be convinced steps already taken will work if given time.
Carney did not issue an official re-assessment of future economic prospects Wednesday, although he prepared the stage for a major climb-down from his prediction of an output contraction of 1.2 per cent this year, growth returning in the third quarter, and a 3.8 per cent expansion in 2010.
By contrast, the OECD projected this week that Canada's economy would barely crawl along at 0.3 per cent growth next year, after shrinking three per cent this year
"The contraction in the first quarter now looks likely to be the worst on record since 1961," when growth statistics first started being kept, Carney said in his speech. That means a tumble beyond the 5.9 per cent retreat of 1991, during the last major recession.
And judging by recent private sector estimates, the economy could be shrinking now at a rate of up to nine per cent.
As well, where growth was supposed to restart in the third quarter, Carney now says the economy could continue to "contract into the second half of this year."
Given that so much depends on global recovery, it is unlikely Carney will stick to his prediction of relatively strong growth in 2010.
But the central banker did have some good news for Canadians.
He expressed confidence that hundreds of billions of dollars in extraordinary stimulus being injected into economies around the world both by central banks and governments -- which he says amounts to about two per cent of gross domestic product -- will work.
And it will work faster in Canada than in many other industrialized countries, he says.
"Canadians can have confidence that the right policies are being put in place," Carney told the Yellowknife Chamber of Commerce.
"They can manage their affairs in expectation -- rather than hope -- of a recovery. They can also expect that once the global recovery begins, the Canadian economy will recover faster than many other industrialized economies."
Carney cautions, however, that nobody is safe yet.
He warns of rising protectionism and that some countries' rescue packages and reforms "are creating barriers to cross-border capital flows.
"This could gather momentum, which would be most ominous if it were to accompany a return to trade protectionism."
