Carney in position to do some good in boosting sagging confidence: analysts

The speech before a Saint John, N.B. business crowd has been in the works for some time, but analysts say it has taken on greater importance because of it’s fortuitous timing.

With global finance ministers and central bankers meeting in Washington within days on the risks associated with Greek and other sovereign debt, as well as the economic slowdown, markets will be looking to Carney for a preview about what policy-makers are planning.

And they will be hoping for something to smile about.

Confidence has taken a hit in Canada in the past 10 months, said Bank of Montreal economist Doug Porter, and Carney can do some good if he takes the first step in boosting morale.

“He’s got to tread a fine line between recognizing realities and delivering another blow to confidence,” Porter said. “He doesn’t want to make the situation worse.”

Confidence readings often get dismissed, particularly in normal times. Cold-eyed economists are fond of saying that intentions don’t boost the economy, actual spending does — and that consumers often don’t do what they say they will.

But in the current environment, where anxiety about risks such as a future Greek default, a run on European banks, or the unknowns associated with Italy, Spain, Portugal and even the U.S., confidence is the economic reality.

The diminishing risk appetite was evident in the markets swoon Monday, which again saw equities tumble and the euro and Canadian dollar fall in a flight to the dubious safety of the U.S. greenback.

Both main indexes in New York and Toronto shed more than 100 points, while the loonie fell 1.11 cents to 101.04 cents US.

“The financial market behaviour in July and August can best be characterized as a loss of confidence in the ability of European and U.S. leaders to deal with their fiscal situation” said TD Bank chief economist Craig Alexander.

“I would say the international leaders should take every opportunity available to them to try and restore confidence.”

Carney is among the few central bankers in the advanced economies who can play a constructive role in easing fears, says CIBC economist Benjamin Tal. At least in Canada.

That’s because, according to Tal’s “consumer capability index,” Canadian households are not in as bad shape as generally believed, given that their debt-to-income ratio of 150% is at a record level. Nor is their confidence as shaken as their counterparts in the U.S. and much of Europe.

Tal notes that while the debt-to-income ratio continues to rise, the speed of its ascent has markedly slowed. Moreover, savings rates are rising and non-mortgage debt has held steady for about a year.

“If (Carney) says he’s not going to raise rates any time soon … people will respond much more in Canada than they would in the U.S. I can give you a zero per cent mortgage (in the U.S.) and you won’t take it, in Canada you’ll jump at it. That’s why monetary policy in Canada is much more powerful.”

Tal does not believe Carney will go as far as he did in 2009 explicitly issuing a “conditional commitment” not to raise rates for a year, but he hopes the central banker will make clear that rates will not rise for some time.

Analysts expect Carney will also attempt to dispel fears that Canada is poised for another recession, if only because there are no clear indications yet of such a stumble and because like everyone else, he has no way of knowing what the near future portends.

Like a doctor, his mission should be “do no harm” and perhaps some good, say analysts.