Conclusion
Let me conclude with some comments on the current economic environment.
The recoveries in advanced economies continue to be dampened by the ongoing need to repair sovereign, bank and household balance sheets. While the U.S. economy is expanding at a modest pace, some of the risks around the European crisis are materializing and risks remain skewed to the downside.
The emerging world continues to be the engine of global growth, although weak demand in advanced economies and the effects of past policy tightening are slowing the pace of expansion in China and other major emerging-market economies.
As a result of more modest global economic momentum and heightened financial risk aversion, commodity prices have fallen in recent months, although they remain at historically elevated levels.
Despite these ongoing global headwinds, the Canadian economy continues to grow with an underlying momentum consistent with the gradual absorption of the remaining small degree of economic slack. Total CPI inflation is expected to fall below 2% in the short term, as a result of lower gasoline prices, while core inflation is expected to remain around 2%.
Canada’s relatively favourable economic performance continues to rely significantly on the resilience of Canadian household spending, supported by very accommodative monetary policy and a well-functioning financial system. Our economy cannot, however, depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth. Notably, housing investment rose further in the first quarter, accounting for an unusually elevated share of the overall Canadian economy. In this context, Canadian authorities are co-operating closely to monitor the financial situation of the household sector, and are responding appropriately. Today, federal authorities have taken additional prudent and timely measures to support the long-term stability of the Canadian housing market, and mitigate the risk of financial excesses.
Against this backdrop, to the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2% inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.
As I have argued today, these global developments will depend importantly on sustaining an open, global system. At the G-20 meeting this week in Los Cabos, Mexico, leaders reaffirmed that “multilateralism is of even greater importance in the current climate, and remains our best asset to resolve the global economy’s difficulties,” and committed to “timely, full and consistent implementation of agreed policies to support a stable and integrated global financial system.”
This resolve bodes well for securing the global transformation and, with it, realizing the full potential of Canadian prosperity.