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Why Mark Carney’s Canadian success story may be about to fall apart

Is the new Bank of England governor an economic genius, or just a man who’s jumping at exactly the right time?

25 May 2013

9:00 AM

25 May 2013

9:00 AM

No Bank of England governor has ever been installed in office with quite so much advance hype as Mark Carney. When he moves from running to the Bank of Canada to his new office in Threadneedle Street, expectations will be running high. Carney arrives with a reputation as a master of economic strategy, a man who can single-handedly steer an economy through the most treacherous of waters, and get a country growing again with a few deft strokes of monetary magic.

Certainly, George Osborne has invested his hopes in him. During Carney’s time as governor in Canada, the country was ‘acknowledged to have weathered the economic storm better than any other major western economy’, he said on announcing the appointment. Most of the financial commentators were happy to sing from the same hymn sheet. A brilliant technocrat, well worth the £874,000 a year the British taxpayer will pay him to run the economy, they chorused. No one has any doubt he is by far the best man for the job.

But is Carney really everything he is cracked up to be? Or is it that no one really knows very much about the Canadian economy — and certainly not enough to question how well it has performed since Carney was installed in 2008? Just as he is packing his bags, there are worrying signs that the Canadian economy is coming off the rails. Increasingly it looks as if he is getting out before it crashes.

True, on the surface, Carney’s record is impressive. He does appear to have played a better hand than most central bankers. Canada is a medium-sized, mature economy, with relatively high levels of welfare — very similar to the UK, but a bit smaller. And yet it sailed through the financial crisis without any of its major banks collapsing. The economy kept on growing — by 3.1 per cent in 2010 and 2.5 per cent in 2011 — whilst other major economies were flat-lining or slipping back into fresh recessions. The property market remained healthy, and unemployment low at just over 7 per cent of the workforce. If the UK had a record like that, we’d all be a lot happier.


In the past few months, however, the outlook for Canada has grown much darker. In the second half of last year, growth ground to halt, with the result that for the whole of the year expansion slowed to 1.8 per cent. Most forecasts predict growth of 1.3 per cent this year, very low by Canada’s historic standards. Only last month, the International Monetary Fund downgraded its growth forecasts for Canada, and warned that there were tougher times ahead.

But it is the state of the property market that is most worrying. In the past decade, Canada witnessed one of the biggest housing booms anywhere in the world. Average house prices doubled between 2000 and 2012. The housing bubble raged just as ferociously as it did in the US, in this country, or in Ireland and Spain. The difference is that in Canada it didn’t come to a juddering halt in 2008 and 2009. Prices kept roaring ahead as if nothing had happened.

Until this year, that is. Now the bubble is finally bursting. Construction of new homes fell by 19 per cent in January this year, to their lowest level since the end of 2009. Sales of existing homes nationwide fell 8.8 per cent from a year earlier. When demand dries up, prices fall. In most cities, prices are now flat, or else going down — in Vancouver, home prices have dropped by 8 per cent since their 2011 peak, and are still going down.

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. Carney’s main claim to brilliance is that none of the major Canadian banks collapsed during the crash. But banks are usually fine so long as the property markets is booming — it is when the market turns down that they run into trouble.

Under the surface, there are signs the Canadian banks lent just as recklessly into the property bubble as ours did. Whilst most countries stopped racking up fresh debts in 2009 — at least personal and corporate debt, if not government borrowing — in Canada they kept going. Canadian households have been borrowing at record rates, and their debts are now 167 per cent of GDP, the sort of level the US was at before the crash. Debt as a percentage of household income is now higher in Canada than it is in either the US or the UK, and it is still going up.

The lending standards in Canada look to have been no more rigorous as any of the 125 per cent self-certified mortgages on offer here before the crash. Canadians are allowed to borrow against their pension and life policies to fund deposits on houses. Even credit cards can be used to finance downpayments. More than half of Canadian mortgages are now guaranteed by the government, and for high-loan-to-value mortgages, the percentage is even higher — meaning that the banks didn’t really have to worry too much about whether they were lending money to people who might never be able to repay it. As a result, the Canadian banks may well have made lots of loans that are about to go sour. Indeed, the 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. Rather like our departing governor Mervyn King, Carney warned Canadians about a housing bubble, and about the risks of taking on too much debt. But, again like King, he also encouraged it with lots of cheap money. In the wake of the financial crash in 2008, interest rates were slashed, and have now been held at 1 per cent since 2010. Given that there was no recession to deal with, it is hardly surprising there was a housing bubble — and Carney was mainly responsible for it.

In reality, Carney inherited an economy that was in perfectly decent shape, and allowed a property bubble to get out of control. It is now bursting with predictably messy results. Installing him at the Bank of England looks like one more desperate attempt to reflate the debt bubble. But what the UK actually needs is a governor who can work out how to get the UK 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.


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