Bank of Canada's Carney warns of mounting risk, predicts bad quarter for economy

Julian Beltrame, The Canadian Press

OTTAWA - Strain from a world awash in debt is increasing the risk to what is already a fragile and weak economic recovery, the Bank of Canada warns.

And Canada faces a second, more immediate challenge from temporary factors such as disruptions from the Japanese earthquake and tsunami that will limit growth to about one per cent this quarter, governor Mark Carney added Wednesday.

"This is a disruptive time, there are a major series of changes going on ... so there will be some volatility," Carney told a Senate committee after his bank released its latest biennial Financial Systems Review.

The U.S. economy — which most Canadian exporters depend on — is a shadow of itself, he said, adding that U.S. households may need a decade to get out from debt.

Meanwhile, although emerging economies are booming, Canada's exporters, with the exception of commodities, are under-represented in that world.

And lastly, there's the mountain of debt weighing on the balance sheets of advanced countries, from Japan to parts of Europe to the U.S., that will dampen growth for years.

The summary put into stark language the findings of the central bank's financial systems review, released earlier in the morning, which took a more pessimistic view of the recovery.

The big problem facing the world is debt. Debt even threatens Canada's economy, given that household indebtedness is at record levels and could grow further before tailing off.

"The key risks to the stability of the Canadian financial system remain elevated and have edged higher since December," the bank concludes in the systems review.

For the first time, Carney revealed to a Senate committee that the current second quarter in Canada could see growth drop all the way to one per cent, from 3.9 per cent in the first three months.

Acknowledging that he had previously predicted growth of two per cent this quarter, which ends June 30, Carney told the senators: "The growth could be even lighter than that, it could be in the one per cent range."

He added, however, that he still expects the economy to do better in the second half of this year.

The bank report and Carney's testimony comes as Greece is again under the gun to hold off a credit default that would likely cripple some European banks and possibly touch off a new round of global financial jitters.

But the Bank of Canada says the debt woes extend further than Greece to other peripheral European nations — Spain, Portugal and Ireland — and over the longer term, to the U.S. and Japan .

Canada too faces a troubling household debt issue, the bank warns, which could be exacerbated by shocks, including an economic downturn and interest rate hikes.

In a separate report card, U.S. Federal Reserve officials also took a darker view of the situation, downgrading growth expectations both for the economy and job creation.

All these risks "are interconnected and mutually reinforcing," the Bank of Canada said.

Carney urged Canadians to keep things in perspective, however, growth is "reclining, not declining," and Canada still benefits from sound fundamentals.

Canada's financial system got a "healthy" grade both in terms of the soundness of the banking system and business balance sheets, but it is vulnerable somewhat to outside forces.

Carney said Canada's exposure to Europe's sovereign debt is small, but not insignificant, given the interconnectiveness of the international banking system.

"The Canadian financial system is not immune to the tensions that are currently affecting European markets," the bank's policy council says in the report.

Finance Minister Jim Flaherty has also expressed concern about the Greek crisis, urging European policy-makers to "create a firewall that would ensure that this type of issue would not spread beyond Greece."

Despite the weak recovery and the pain it will cause, governments have no choice but to start the process of getting their fiscal houses in order, said Carney.

He cautioned that indebted countries, even the U.S., shouldn't assume bond markets will be always be prepared to fill their credit needs at reasonable rates. Canada learned that lesson the hard way in the 1990s, he pointed out.

"Our experience in the mid-1990s is that the bond market is there and then it's not," he said.

Domestically, the bank is still very worried about Canadian household debt, which is at an all-time high of 147 per cent of disposable income.

The risk, it says, is that as household finances get squeezed, Canadians will have less money to spend on consumer goods, which would slow down economic growth.

"Further moderation in the pace of debt accumulation by households is needed to contain the buildup of this vulnerability," it says.

The bank also cites global imbalances, the two-speed recovery where advanced nations grow far slower than emerging economies, as additional risks that appear no closer to resolution.

"If the significant fragilities that still burden the financial system are not addressed in a timely manner, the progress achieved to date could be derailed," the bank said.

TD Bank economist Diana Petramala said the report suggests the Bank of Canada is very much in worry mode, and is unlikely to raise interest rates — which could weaken the economy — until 2012.

"All of these risks (cited by the central bank) could have significant economic consequences on Canada’s economy and financial system," if they are borne out, Petramala said.

"In addition, they are medium-term (rather than short-term) in nature, suggesting they are unlikely to disappear any time soon. Under our current forecast, we don’t anticipate Canada’s overnight rate to reach a more normal level of three per cent until 2013."

The bank last hiked interest rates last September , lifting its policy setting to one per cent, still exceptionally low by historical standards. http://ca.finance.yahoo.com/news/Bank-Canada-Carney-warns-capress-4229338819.html?x=0

Regional Light Rail Transit Plan Passes

WATERLOO REGION — In six years, expect to see trains on city streets, carrying passengers to work, home and school.

In a historic decision, regional council voted 9-2 Wednesday to build an $818-million rail transit system, the largest public works project ever undertaken in the region.

Council believes the leap to rail transit will:

• Persuade investors to build homes and workplaces in central neighbourhoods. It’s expected this will happen within 800 metres (walking distance) of stations.

• Draw residents from their cars and reduce by $500 million the anticipated spending to expand roads.

• Help curb suburban growth into green fields as the regional population swells to 729,000 by 2031, up from 544,000 today.

“This is a long-term vision of what our community will require to sustain itself,” Kitchener Mayor Carl Zehr said.

“I ask for our entire community to stop waiting for the future to happen. Instead, join us in creating it.”

“It is rare that an opportunity comes along that we can truly make a transformational decision,” said Coun. Sean Strickland of Waterloo. “It is time to seize the day. It is time to face the future with boldness and courage.”

“It can help to shape the look of our urban centres, to make them look more vibrant, more green,” said Coun. Jean Haalboom of Kitchener.

Critics fear trains will prove a costly blunder in a car-friendly community where commuters shun transit. Some critics argue rapid buses — at $702 million — are a cheaper, more flexible way forward.

“It is not what I believe our citizens want,” Waterloo Mayor Brenda Halloran said, in opposing trains. “Vision means different things to different people.”

Halloran said she was overwhelmed by public opposition to trains and their cost during the municipal election last October. She pledged then to oppose the plan and is sticking to her campaign promise.

“Right off the bat, we heard door after door after door, our citizens’ complete opposition to the light rail transit system,” Halloran said.

“That is the message that many of us heard while campaigning. What has happened to the voice of our citizens?”

“I stand alone for Cambridge,” Coun. Claudette Millar of Cambridge said, in voting against the $818 million plan. “It’s not that we want to be snippy. It’s the facts as we have heard them.”

About 140 people packed into council chambers to watch council approve trains. Most stood to applaud after the vote.

Observers have likened the rapid transit debate to the grand vision that launched the local expressway in the 1960s, also amid controversy and expense.

The approved plan and latest timeline suggests that by 2017 you will see electric trains, drawing power from overhead wires, running 19 kilometres between Conestoga Mall in Waterloo and Fairview Park mall in Kitchener.

The trains will run in dedicated lanes, displacing traffic. They will travel at the speed of traffic, averaging about 30 km/h, and will share signalized intersections with traffic. They will trigger green lights while cross-traffic waits.

Trains will pass every 7.5 to 15 minutes and stop at up to 18 platforms. Mall-to-mall travel time is estimated at 39 minutes, up to nine minutes faster than the schedule for express buses today. Fares are undetermined.

Trains will split onto separate streets in the downtowns of Kitchener and Waterloo, operating curbside rather than in the middle of the street.

From Kitchener, buses driving in mixed traffic will carry passengers 17 kilometres into Cambridge, linking to the Ainslie Street terminal. Buses will operate every 10 to 15 minutes and could begin to launch next year.

Cambridge is getting buses instead of trains because transit ridership is lower there, redevelopment potential is less, and rapid transit is being implemented in stages to save money.

Unlike trains, buses will not have dedicated lanes. Instead they will have features to bypass congestion, for example bypass shoulders on highways, special lanes to bypass queues at intersections, and the ability to trigger green lights.

Cambridge travel time is estimated at 33 minutes, up to two minutes faster than today’s scheduled express buses. There’s a new stop at Sportsworld Drive and a new route on Hespeler Road.

Council pledged to also launch trains in Cambridge in a later stage that has no funding or launch date. This delay has upset many in Cambridge.

“They feel very discouraged and disenfranchised,” Cambridge Coun. Nicholas Ermeta told councillors.

To pay for all this, council voted 10-1 to hike your regional property taxes by up to seven per cent, phased in over seven years.

An average home assessed at $254,000 will pay a total of $450 between 2012 and 2018. By 2018, property taxes will be up to $113 a year higher than today.

“I do not believe it to be an onerous amount,” Zehr said. “This is a reasonable figure.”

Waterloo’s Halloran opposed the tax increase.

The increase covers construction and operating costs for trains and expands Grand River Transit bus service by 25 per cent, to help feed suburban residents into central trains.

To ease costs, politicians have delayed the original plan to expand supportive buses by 60 per cent. This expansion will now happen after trains launch.

Senior governments are paying up to $565 million, leaving $253 million to local taxpayers.

To limit the tax increase, council has pledged to pay about one-third of increased costs out of current regional spending, drawing on paid-off mortgages and welfare costs soon to be assumed by provincial taxpayers.

To further limit tax increases, developers may be charged higher fees on new homes and buildings. This will require provincial approval.

Regional council will spend $10 million over 10 years on projects meant to help build transit ridership in Cambridge.

Council also voted 10-1 to review the proposed route in downtown Waterloo. Strickland and Coun. Jane Mitchell said they have heard concerns about trains using the intersection of King and Erb streets.

Halloran opposed the review, saying Waterloo council favours the route as proposed. “It came as a complete surprise to us,” she said about the route review.

Politicians have already spent $7 million to develop the rail proposal over nine bumpy years.

Council proposed trains in 2002. Senior governments refused funding but agreed to pay for more studies, leading to the proposal finally approved and funded Wednesday.

Four councillors declared conflicts of interest this year because they, their children or their employers own properties near stations, where land values are expected to rise.

Candidates stampeded away from rail transit costs in the municipal election last October, as residents trashed the plan on doorsteps.

After the election, politicians reconsidered buses, ordered more public consultation and rejected a late call for a referendum. The plan they approved is the same plan council approved in 2009, before funding was known.

Three councillors who voted for rail transit acknowledged they had been critical of the plan and its costs during the 2010 election.

They said they have since been persuaded to support trains, responding to planners, research and public support.

“I started putting it in perspective,” Woolwich Mayor Todd Cowan said.

“I think people have a better understanding of the whys and whats of LRT,” said Coun. Geoff Lorentz of Kitchener. “There is no question that the steps we will take tonight are the right ones.”

“I can support this,” Wilmot Mayor Les Armstrong said. “There is good work here.”

Council’s approval delighted Tim Mollison of the pro-rail Tri-Cities Transport Action Group.

“We’ve taken the first steps in changing how our community thinks about people who use transit,” he said. “It’s important that we continue to keep the pressure on regional council to follow through on the promises that they’ve made to Cambridge today.”

Leading technology, business and environmental organizations have endorsed trains. This includes Communitech, representing local technology firms, and the Greater Kitchener Waterloo Chamber of Commerce.

Cambridge council and the Cambridge Chamber of Commerce endorsed rapid buses, arguing this would be fairer because all three cities would get the same transit system right away.

Three scientific public opinion polls conducted this spring found the community divided over transit options, with 18 to 32 per cent of residents seeing no need for any rapid transit.

According to the polls, residents who favour rapid transit in principle lean more to trains than buses. However, residents are also concerned about the high cost of trains.

A poll by The Record found trains are more appealing to the young than the old, and more appealing to men than women.

Planners estimate trains will not launch before 2017. Between now and then, council has to conclude more studies, decide how the project will be built and by whom, formalize funding agreements with senior governments, sign contracts and order vehicles.

Politicians have not yet decided how deeply to involve private investors in the project.

Work to relocate or encase utilities beneath streets could launch by next year, to prevent ruptures and maintenance from disrupting transit. Track construction could launch by 2014.

jouthit@therecord.com