The governor of the Bank of Canada says that Canada and the rest of the global economy must adjust to a much different world in the years ahead, including lower growth rates.

In a speech to the Winnipeg Chamber of Commerce Thursday, Mark Carney suggested that recovery is underway, but it is not yet clear how sustainable it will prove.

“Ultimately, the sustainability of the recovery depends on the private sector. As yet, there are few indications of autonomous private demand in most advanced economies,” he said.

“In these countries, high unemployment rates, still-challenged financial sectors, and weak household balance sheets will slow the return to pre-crisis growth rates.”

Nevertheless, Carney said that 2010 should be the year that sees a return to economic growth driven by private sector demand. By next year, the private sector should be the sole contributor to domestic demand growth in Canada, he noted. Although, he suggested that in many economies, it will take time for real output to return to pre-crisis levels. He expects Canada will get there in the third quarter of this year, but that it will be another 18 months before Europe and Japan make it back.

Canada’s corporate sector has a number of advantages, including relatively robust domestic demand, productive financial conditions, signs that credit conditions for businesses are starting to ease, and that business fixed investment should pick up in 2010. “However, given the external environment, the question is whether this pickup will be sufficient,” he cautioned.

“Canadian companies are emerging from the recession to an altered world — one that may require deeper restructuring and bolder strategic initiatives than currently contemplated. New suppliers need to be sourced; new markets opened; a new approach to managing for a more volatile environment developed. To recognize this reality is also to recognize the opportunities available to corporate Canada,” Carney said.

The big question for many Canadians is what these signs of recovery will mean for employment, Carney noted. And, importantly, for the entire economy, is how productivity will fare.

He observed that the central bank “does not entirely understand why productivity growth has been as slow as it has been”, although it does understand that weak productivity growth means that the rate of potential growth rate of the Canadian economy has fallen.

“The combination of slower productivity growth and demographics could mean that the rate of potential growth for the Canadian economy will be closer to 2% going forward than the more than 3% average rate we enjoyed in the first half of the past decade and the latter half of the 1990s,” he said.

Canada isn’t the only country facing the possibility of a fundamentally different economy in the future. Carney noted that, “over the medium term, the pattern and pace of global growth could be significantly altered. The rate of potential growth in the global economy has likely fallen and will take time to rebuild. The rotation of global demand and the restructuring of corporate and household balance sheets are generating important headwinds to economic activity in advanced economies. Conversely, emerging markets are becoming more dominant in the global economy.”

Additionally, global growth may not only be lower in the future, but could also be more volatile, he said, owing to factors such as growing fiscal pressures in many countries, capital inflows to emerging-market economies are creating risk that these economies may overheat, and the threat of trade and financial protectionism.

“Securing strong, sustainable, and balanced global growth will require changes in behaviour and policy adjustments on several fronts. These include: a sustained fiscal consolidation in the United States and several other advanced countries; an upward adjustment of U.S. household savings; increased, policy-induced domestic demand in China and other major emerging-market economies; and a real exchange rate appreciation in countries with large current account surpluses,” he suggested.

Failing that, the global economy could see a return to large, and unsustainable, current account imbalances; or, weak global demand and disinflationary pressures.

IE