Canada must seize the day as other countries struggle with debt, says Carney

The task is so large that Carney compares it to what occurred during the Great Depression of the 1930s, and is by no means assured to go smoothly.

“As a result of deleveraging, the global economy risks entering a prolonged period of deficient demand,” Carney said in notes of the speech released in Ottawa.

“If mishandled, it could lead to debt deflation and disorderly defaults, potentially triggering large transfers of wealth and social unrest.”

In Europe, the government debt crisis has led countries with huge deficits to cut pensions, thousands of public sector jobs and to raise taxes in an austerity drive to balance the books and secure new bailout financing.

In this economic squeeze, European banks face big losses and have tightened their lending, while companies are scaling back investments — raising fears of a looming recession.

The same trends are not as pronounced yet in the United States, but things are also trending negatively in the world’s biggest economy.

The U.S., for instance, faces a situation where the combined debt of individuals, government and non-financial corporations has reached 250 per cent of the country’s gross domestic product, or about US$120,000 per individual.

That’s about where it was in the midst of the Great Depression nearly 80 years ago.

Carney did not give a corresponding figure for Canada, but noted that the fiscal position of Canadian governments is best in the G7 group of big industrial nations, and that of corporations is at a record low.

“Canada’s relative virtue throughout the debt super cycle affords us a privileged position,” he said. “Our strong position gives us a window of opportunity to make the adjustments needed to continue to prosper in a deleveraging world.

“But opportunities are only valuable if seized,” he warned.

The federal government and provinces such as Ontario and Quebec are likely facing a few years of austerity as they try to balance the books in a slow-growth era.

Carney said Canadian companies in particular must seize the moment, before it disappears.

Businesses can benefit from one of the world’s soundest banking systems in Canada, super-low interest rates and their own sound balance sheets flushed with cash. As well, firms in the resource sector can place a safe bet that commodity prices will remain elevated.

What better time to invest to boost productivity and make inroads in the fast-growing emerging nations.

“This would be good for Canadian companies and good for Canada,” he said. “Indeed, it is the only sustainable option available. A virtuous circle of increased investment and increased productivity would increase the debt-carrying capacity of all, through higher wages, greater profits and higher government revenues.”

Governments, Carney said, should resist basking in the glory that they have the strongest finances in the G7 and continue to bring down deficits, because the climate for restoring budgets to balance is harsher than it was in the 1990s.

Then, Canada’s labour markets were expanding due to demographic changes, the Canadian dollar was low and the world was entering a cycle of strong growth.

“Today, our demographics have turned, our productivity growth has slowed and the world is undergoing a competitive deleveraging,” he noted.

Carney saved the biggest red flag for Canadian households, which have been on an extended spending splurge, particularly on homes.

Excessive borrowing has lifted household debt-to-income levels to a record 149 per cent. They are now more indebted than households in the U.S. and Britain, he said.

He said households need to reduce their dependence on borrowing for purchases before consumers get in over their heads.

With files from Julian Beltrame