Bank of Canada's Carney warns of headwinds to economy

Bank of Canada governor Mark Carney says risks to Canada's economic recovery are dissipating, but warns of serious headwinds if changes aren't made.

In a speechto the Greater Kitchener-Waterloo Chamber of Commerce this afternoon, Carney says the European debt situation has improved significantly, and the recovery in the United States continues to take hold.

However, Carney warned that exporters in this country need to focus more on emerging markets, and that Canadian households are too heavily in debt.

According to the Bank of Canada, just eight per cent of Canadian exports went to the world's fastest growing economies such as China, India andBrazil while 85 per cent went to Canada's traditional trading partners like the United States and Europe. Not a single one of Canada's traditional trading partners saw economic growth abovetwo per cent last year.

"The combination of overexposure to the U.S. market and underexposure to faster-growing emerging markets is almost entirely responsible," he said.

"In short, our underperformance prior to the crisis was more a reflection of who we traded with than how effectively we did it," a situation that has been exacerbated since the recession.

Since 2000, Canada has the second worst export performance in the G20 group of nations. As a part of the total global export market, Canada has gone from a share of 4.5 per cent to about 2.5 per cent and the country's exports of manufactured goods has been cut in half, Carney said.

That explainswhy employment in the factory sector has fallen nearly 500,000 jobs, he added.

Carney also said that ashouseholds continue to pile on debt, the economy cannot rely on domestic spending to maintain growth rates, further highlighting the need to grow export markets.

Looking for guidance

Carney's speech represents his first public comments since leaving the bank's key interest rate unchanged last month andthe release of thelatest federal budget

While the budget outlines broad cuts to public spending, it did not address the possibility of changes to Canada's mortgage market.

Both Carney and Flaherty, as well as other private-sector economists, have previously spoken out about therising debt levelsof Canadian households thathave been largely fuelled by mortgages. A recent survey indicated that nearly half of Canadianscouldface financial difficultiesif rates were to rise two percentage points.

Economists warn of possible dangers

Some analysts expected changes to be outlined in the budget, but no such provisions were made.

The budget did, however, include more than $5 billion in public spending cuts, including over 19,000 public-sector jobs cuts and changes to Old Age Security.

However, several bank economists havealsowarned that a reduction in spending by Ottawa could be dangerous if done during a period of slow economic growth.

On Friday, Statistics Canada said gross domestic productexpanded just 0.1 per centin January after a 0.5 per cent expansion the month before.