July 23, 2008

Bank of Canada’s Carney shares his oil-wealth optimism

OTTAWA

Canadians all over the country are profiting from the ongoing commodities boom and helping to rescue the economy from recession, the Bank of Canada says.

“The Canadian economy remains robust,” governor Mark Carney told a news conference after releasing the bank’s quarterly monetary policy report.

It’s a surprisingly upbeat analysis, given the bank’s warning two days earlier about spiking inflation. The central bank said “available evidence” indicates the economy has bounced back from a first-quarter dip and grew at an annualized rate of 0.8 per cent in the April-June quarter.

And it says the economy will recover further, growing at a rate of 1.3 per cent in the current July-September third quarter, 1.8 per cent in the fourth and 2.8 per cent in the first half of next year.

Unlike most industrialized countries, Canada benefits from rising oil and natural gas prices, Carney said — and this effect is not confined to Alberta and other producing provinces.

“There are variety of industries that feed into the energy industry, including manufacturing industries in Ontario and other areas of Central Canada; there are wealth effects in portfolios; there are wage effects for secondary and tertiary industries spread across the country,” he said.

This money adds strength to other sectors, including construction and services in Central Canada, he added.

“And that puts us, in the industrialized countries, in very rare company.”

Carney also said Canada’s banking system is the envy of the world, as financial institutions in the United States and Europe remain enmeshed in an ongoing debt crunch.

“The Canadian system is very strong,” he emphasized. “The banks are well capitalized, they are quite frankly at the leading edge of disclosure.”

“In a world of de-leveraging of the financial system, many global financial institutions are trying to get where our financial institutions are, and they are quite a ways away.”

The Bank of Canada’s report says domestic borrowing is about three-quarters of a percentage point less expensive now than it was last summer at the beginning of the credit crisis.

The bank’s latest assessment came as Ontario’s manufacturing sector got more bad news with the announcement that Sterling Trucks is laying off 720 workers this fall in St. Thomas.

The truck maker joins the growing ranks of Canadian manufacturers squeezed by an economic slowdown in the U.S. that has cut demand for everything from vehicles to lumber and cement.

And Jayson Myers of the Canadian Manufacturers and Exporters sharply questioned Carney’s contention that oil wealth is being widely spread.

“If anybody should know it, the Bank of Canada should know it, the damage this is causing to the value-adding, the manufacturing sector and the high-value services sector,” he said. “We are in very serious danger of losing a very large part of the value-adding sector of the economy.”

Global Insight economist Dale Orr also questioned the central bank’s contention that oil revenues are lifting most boats, saying provinces without oil and gas resources are net losers, particularly manufacturing-heavy Ontario.

The central bank, however, sees the economy as a glass half full and filling up more quickly than several economists said was likely.

“Our primary concern is that event risk will remain extraordinarily high and the financial infrastructure of the economy will remain strained for a long time yet,” said Scotiabank economist Derek Holt.

Canadian Press

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