Canada 'likely' headed for recession but will fare better than many other countries, says Carney

The former governor of the Bank of Canada said the former British. PM's budget fails because the numbers don't increase

Former Bank of Canada and Bank of England Governor Mark Carney said Canada was likely headed into recession next year but would do better than many other countries and bounce back more quickly because of its strong economic fundamentals.

Carney made comments before a Senate committee on banking, trade and the economy Thursday. He also explained to lawmakers why he thinks British Prime Minister Liz Truss' mini-budget is causing so much financial turmoil in his country. "I think a recession is most likely global and most likely in Canada," Carney said.

"I think it's like this - I'm afraid it's like air travel these days. We know where we're going, we just don't know when we're going to get there, so there's some uncertainty about the exact time."

Carney told senators that China was "effectively in recession" now. Europe, he said, is entering a recession and Britain is already in one - and while the United States' economic momentum is underpinning Canada, it will be in recession "at some point" next year.

"It would be difficult for us, [given] those accumulative factors, for Canada to be a complete exception to that," he said. "The combination of all of that is likely to lead to a recession, at least a few quarters of negative growth in Canada."

That prediction is darker than what Pierre-Olivier Gourinchas, chief economist for the International Monetary Fund, gave CBC's Rosemary Barton Live in an interview airing Sunday.

"We're having the slowdown we project in Canada," Gourinchas told Barton. "We see growth falling to around 1.5 percent next year, so that's a downward revision.

"The Canadian economy has rebounded well but is being hit by the same winds that are affecting the global economy."

Gourinchas said that while unemployment in Canada and the US will increase in the coming years, both labor markets are very strong and unemployment "hopefully remains fairly modest."

Canada recovers faster: Carney

Carney cites a strong labor market and low unemployment as reasons why Canada will do better than other countries in the face of the impending recession.

He said Canada's job market was strong because the country's pandemic benefits, such as the Canadian Emergency Wage Subsidy, helped keep workers tied to their jobs, meaning Canada lost fewer jobs than other countries.

Carney also said that Canada's international trade agreements with all other G7 and Pacific Rim countries would help it recover more quickly.

I see no reason that there would be a problem with our bond rating or credit rating or any kind of short-term issue," he said.

And because the US is faring better than any other country right now, Carney said, its economic strength should support Canada's recovery.

"We can come out of this much stronger than others, without question, but we have to be clear about what we're going for," he said.

"It's a hurricane, not a hurricane. That's how I'd say it."

English fluff and basic math

Carney was also asked by senators to explain the recent financial and political turmoil in Britain.

Liz Truss announced Thursday that she was stepping down as prime minister, just over six weeks after taking control of the Conservative Party as leader. His resignation comes after Kwasi Kwarteng resigned last week as chancellor of the British finance minister.

Both saw their political careers explode after the so-called Kwarteng mini-budget on September 23 sent the UK market into a tailspin by offering deep tax cuts without explaining how they would be funded.

"I think one of the big reasons why it failed is, it's half the story," Carney said. "They majored in tax cuts as a solution as opposed to all the other legwork required to build productivity over time."

Carney said the Truss government wanted to make a "big bang" with tax cuts and funding to help British households pay for rising energy costs before delivering another budget in late November that would fill the hole.

Carney said Truss was never allowed to deliver that November budget because his government's decision to announce unfunded tax breaks made it appear as though he had a "trickle down strategy, only tax cuts."

"Which in itself is not a credible strategy for a 21st century economy," he said.

Carney said Truss' failure to provide for the costs of the cuts, and his efforts to roam around parliamentary institutions such as the Canadian Parliamentary Budget Officer equivalent in the UK, undermined his credibility.

"They moved to seven per cent of the GDP deficit overnight. They already have a seven per cent current account deficit and the numbers don't add up. And then they act as if it doesn't matter," he said.

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