Flaherty, Carney take cautious tone on economy

Bank of Canada governor Mark Carney told MPs on Friday that the turmoil working its way through financial markets will bring uncertainty, but thebank is ready to deal with any problems.

Carney was speaking to the Commons finance committee,which had asked him and Finance Minister Jim Flahertyto share their views on the outlook for Canada's economy.

Carney took a cautious tone in his remarks, explaining that while there are many threats to growth, the central bank is monitoring developments closely and has not made any major changes to its outlook recently.

"The considerable headwinds are now blowing hard," Carney said. "[But] the bank has a wide range of tools and policy options it will continue to employ [to deal with the crisis]."

Carneyrenewed his call for productivity improvements, noting that U.S. firms have invested heavily in becoming more productive while credit is comparatively cheap.

"Their actual investment in machinery and equipment is well above what's happened in Canada," he said.

He alsosaid the Canadian dollar's strength is compounding the current crisis for Canadian firms.

Inflation data released earlier Friday morning which showed thatCanada's consumer price index fell to 2.7 per cent last month is well within the parameters the central bank expected in its last monetary policy report,Carney said.

Therecent U.S. debt ceiling crisis has the potential to negatively impact Canada, but it's not yet clear to what extent, he said.That's because the solution called for cutting more than $1 trillion in spending over the next decade, andit's notyet known where the cuts will be made.

"The devil is in the details [because] the specific spending cuts have not been decided on," Carney said.

He lauded the U.S. Federal Reserve's move last week to publicly state its conditional commitment to keeping interest rates low for the next two years. But he stopped well short of making a similar pledge for Canada.

"We do not outsource monetary policy to the Federal Reserve," Carney said. "There's been times when rates have been 200 basis pointsabove the rate in the U.S. and there's been times whenit's been200 points below, because that's what was appropriate at the time."

"The policy stance at the Federal Reserve is not the policy stance of the Bank of Canada."

Flaherty preaches calm

Earlier,Finance Minister Jim Flaherty told committee members the economic crisis in theU.S. and Europe will inevitably have an impact on Canada, but the economy hereis growing, albeit slowly.

Flaherty said the current crisis is largely due to lack of confidence in the ability of governments to lower their debt levels. Fixing the problem will require bold action by the U.S. and other governments, he said.

He continued his refrain that Canada is comparatively better off than other countries but not immune to the global problems.

"We're on track to balance the budget," Flaherty told the Commons finance committee. But he alsoacknowledged that the journey there might be a bit bumpy.

"Global turmoil will inevitably impact our trading relationships and our economy."

Flaherty rejected the notion that current economic problems are a continuation of the malaise that began in 2008. That crisis was largely triggered by financial institutions, he said.

"The current problem is largely a lack of confidence in governments to move forward with concrete plans to deal with their deficits," he said.

NDP finance critic Peggy Nash, the first to question the minister after his opening statement to the committee, asked why the government has chosen spending cuts as opposed to investment in growth to bring Canada back to balanced budgets.

"The member is advocating more spending now," Flaherty responded. "That actually is the problem. Too much spending. It's exactly what we should not do."

He noted the NDP voted against the government's initial stimulus spending program to react to the crisis in 2008.

"That was wrong then and I daresay wrong now," Flaherty said.

No new bank tax

He also reiterated the government's opposition to any sort of new financial transactions tax.The idea gained steam last week when French and German leaders floated a tax on all financial transactions in Europe as a way to build a rainy-day fund to bail out troubled firms and countries, while discouraging speculation.

The idea was also popular in the run-up to the G20 Summit in Toronto last year, where Flaherty poured cold water it.

"Canada will continue to oppose any sort of financial transactions tax," Flaherty said in response to a question by Conservative MP Dean Del Mastro. "Itis scapegoating and itdoesn't address the issue."

Deputy Bank of Canada governor Tiff Macklem, speaking after Carney and Flaherty, said the central bank predicts "roughly flat" or "possible slightly negative" economic growth for Canada in the second quarter.

In its July Monetary Policy Report, he said, the bank forecast a"fairly weak"second quarter, with growth of 1.5 per cent in gross domestic product.

Macklem said subsequent dataprompted the bank todowngrade its projections from July. He told MPs, however, that the bank expects the Canadian economy to "recover" in the second half of the year.