Which major economy has been racking up the most debt, and at record levels? Cyprus perhaps, with its collapsed offshore banking system stuffed with Russian money? France, with its large state and taxes? The US, teetering on a fiscal cliff that continually threatens to shut down the government? Or Britain, with a deficit that refuses to come under control and a culture of rampant borrowing that has made pay-day lenders about the only growth industry left in the country? Actually, if you look at consumer debt, the answer is Canada.
Hold on a second! Isn’t Canada meant to be a safe, if slightly dull, place – the one that steered its economy so successfully through the financial crisis that we’ve poached its central banker to see if he can perform the same miracle here? I’m afraid so.
In the summer, Mark Carney will leave his job as governor of the Bank of Canada and take over the same role at Britain’s central bank. He will occupy a pivotal role in the British economy. He has been portrayed as a superman, an ultra-smart technician who safely steered the Canadian economy through the financial crisis.
There has certainly been no shortage of fanfare around Carney’s appointment. Chancellor George Osborne has praised his exceptional handling of the Canadian economy. During Carney’s five years as governor in Canada, the country was “acknowledged to have weathered the economic storm better than any other major western economy”, according to Osborne.
On the surface, at least, there was some truth in that claim. Canada sailed through the financial crisis without any of its major financial institutions collapsing. The economy kept on growing – by 3.1% in 2010 and 2.5% in 2011 – while other major economies were either flat-lining or else slipping back into fresh recessions. The property market remained healthy and unemployment low at just over 7% of the workforce. If Britain had a record like that, we’d all be a lot happier.
The trouble is, there are now signs that Canada is coming off the rails. The economy is flat-lining and the housing market is going into reverse. Inthe second half of 2012, growth suddenly ground to a halt and for the whole of the year expansion slowed to just 1.8% from 2.6% a year earlier. Most forecasts predict growth of just 1.3% this year, very low by Canada’s historic standards.
Meanwhile, the property market looks to be in trouble. Construction of new houses plunged 19% in January this year, dropping to its lowest level since the end of 2009. Sales of existing houses fell 8.8% from a year earlier. In most cities, prices are now flat, or else going down – in Vancouver, prices have dropped by 8% since their 2011 peak.
As we know from elsewhere in the world, once property markets start to fall, the banking system and then the economy are not usually far behind. Indeed, the credit-rating agency Moody’s has already downgraded a string of Canadian banks because of their exposure to a wobbly real-estate sector.
In fact, it now looks as if all Carney really did was keep the debt-fuelled boom running longer than anywhere else. While most countries stopped racking up fresh debts in 2009 – at least personal and corporate debt, if not government borrowing – Canada didn’t. Canadian households have been borrowing at record rates, and debt is now at the levels – 167% of GDP – America was at before the crash.
Debt as a percentage of household income is now higher in Canada than it is in either America or Britain, and it is still going up. Overall, debt remains lower, but only because Canada does not have a bloated banking system like other Anglo-Saxon countries. But government debt is relatively high as well – at 83% of GDP it is higher than in Britain, for example.
Rather like Mervyn King, the outgoing central bank chief, in this country, Mark Carney has warned Canadians about a housing bubble and about the risks of taking on too much debt. But, again like King, he had also encouraged it with lots of cheap money. In the wake of the financial crash in 2008, rates were slashed and have now been held at 1% since 2010.
Given that there was no crash to deal with, it is hardly surprising that there was a housing bubble – and Carney was mainly responsible for it.
The simplest explanation for Canada’s recent success is therefore not Carney’s brilliance, but resource prices. Canada has a lot of raw materials. In particular, it sells a lot of oil to America: Canada is the largest energy exporter to America. With the opening up of the shale gas industry, prices have been under pressure – and Canada has started to suffer as a result.
In truth, it now looks as if Carney took an economy that was in perfectly decent shape and created a housing bubble that is about to burst, with predictably messy results. Installing him at the Bank of England looks like one more desperate attempt to reflate the debt bubble.
But what Britain actually needs is a governor who can work out how to get the country growing again without the artificial stimulus of borrowed money. There is no evidence to suggest that Carney is the man for that task. And there is a worrying amount of evidence that he is getting out of Canada in the nick of time.