Bloomberg News

Carney Says Europe Poses ‘Biggest Risk’ to Canadian Economy

October 26, 2011

Oct. 26 (Bloomberg) -- Bank of Canada Governor Mark Carney said the European sovereign debt crisis poses the biggest threat to economic growth in Canada and will take years to resolve.

“It’s certainly the biggest risk that faces the Canadian economy,” Carney said at the Buttonwood conference in New York today. While he said he’s “quite confident that they will take sufficient steps to contain it,” he said that “won’t be enough to resolve it.”

The Bank of Canada today cut its forecasts for growth through the middle of 2012 amid a weak U.S. economy and a projected recession in Europe. It said the expansion will accelerate more quickly than estimated starting later next year.

In its quarterly Monetary Policy Report, the bank cut its projection for global growth by almost a full percentage point next year, and said the recovery will be slower than what typically follows recessions as consumers, governments and businesses reduce debt.

For Europe to successfully address the crisis, political leaders will need to “level with people about the time scale of what’s going on” and “make it clear it will take a few years” to resolve, Carney said. “This is not ‘Here’s the communique everything’s solved, happy days are here again.’”

Even if the crisis is contained, there will be “quite strong deleveraging pressures” on the European financial system which will be felt in the U.S., Canada, and around the world, Carney said. “A bunch of assets are going to come for sale,” and it’s “quite possible” a lot of them will be U.S. dollar assets, he said.

Global Growth

“That’s one reason our global growth forecast for next year is just about 3 percent,” he said.

The Bank of Canada yesterday removed a reference to withdrawing stimulus in a statement that may signal Carney will extend his pause on borrowing costs to as late as 2013.

The economy will grow less than projected and take longer to return to its capacity level as weak U.S. growth and a “brief” European recession hurt confidence and reduce export demand, the central bank said after keeping its policy rate at 1 percent. Inflation will also be slower than earlier forecast, falling to as low as 1 percent next year, the Ottawa-based bank said.

--Editors: Kevin Costelloe, James Tyson

To contact the reporter on this story: Caroline Salas Gage in New York at csalas1@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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