Global recovery a global responsibility

Advanced and emerging economies have a shared responsibility for narrowing imbalances in global growth that could threaten the world’s economic rebound, Bank of Canada Governor Mark Carney says.

Mr. Carney’s comments in a speech Wednesday marked the second time in a week that he threw his weight behind a key priority for the coming Group of 20 summit in Toronto: addressing the uneven nature of the global recovery.

The tricky balancing act for advanced economies, from the United States to Europe to Japan, is to persuade markets they are serious about trimming their massive debt loads, without moving so aggressively that this year’s revival in global demand sputters to a halt, Mr. Carney said.

The fastest-growing emerging powerhouses (such as China, although he didn’t say so) should keep their economies from overheating by letting their exchange rates float more freely, instead of wasting time with "stop-gap" measures, he suggested.

That would help remedy the lopsided nature of the global economy whereby rapidly expanding, export-driven economies in Asia rely on consumers in the U.S. and other rich nations to fuel their growth, an imbalance that exacerbated the financial crisis of 2008.

"There are some signs that trade balances, having compressed during the recession, are returning to patterns seen before the crisis, with surpluses and deficits increasing," the International Monetary Fund said in a report released Wednesday, which had been prepared for the June 4-5 meeting of G20 finance ministers and central bank governors in Busan, South Korea.

China's current account surplus, a broad measure of trade flows, fell to 5.8 per cent of gross domestic product last year from 11 per cent in 2007, according to the IMF. The U.S. current account deficit shrank to 3 per cent last year from more than 5 per cent in 2007. Those shifts occurred largely because of the collapse in global commerce during the recession. But even as the world recovers, such reversals are proving to be short-lived.

Last Thursday – as Mr. Carney was telling an audience of securities regulators in Montreal that the financial industry must embrace and prepare for “radical” change to the way it does business – the U.S. trade deficit rose to the highest level in 16 months and the country’s shortfall with China swelled more than 14 per cent to the widest since November. That reignited the always simmering criticism among some lawmakers in Washington that Beijing remains married to unfair policies that artificially boost Chinese industry at the expense of U.S. manufacturers.

On Wednesday, Mr. Carney appeared more optimistic about European efforts to tackle deficits than he did about measures taken by emerging nations to cool their scorching economies.

There is a "shared responsibility" among all G20 countries to find ways to make up a $7-trillion gap in worldwide output that he said the coming ``age of austerity” in advanced countries could cause if emerging markets don’t increase domestic demand and make their exchange rates more flexible.

However, while arguing European measures so far have demonstrated "conviction," Mr. Carney said policy moves in emerging markets such as capital controls and tighter mortgage lending standards are mere "stop-gap measures in the face of broader forces" that are of "unproven effectiveness." Without less micromanaging of their currencies, Mr. Carney effectively said, "ultimately, there are only two possibilities in emerging-market economies: either higher interest rates or higher inflation."

"Mr. Carney has been quite clear, probably even more emphatic than the Finance Minister or the Prime Minister, on the things the G20 has to keep on the ball on, perhaps arguing a little bit more on the exchange rate side because he’s one more step removed from the politics of it," Michael Gregory, a senior economist at BMO Capital Markets in Toronto, said in an interview.

"Does this help the situation in terms of supporting the efforts of what Canada via the government thinks it’s best for the G20 to do? Absolutely."

(Published by The Globe and Mail – June 17, 2010)

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