Timothy Lane, deputy governor of the Bank of Canada, highlighted the risks posed by sovereign debt concerns and global imbalances in a speech Tuesday.

Speaking to the Winnipeg CFA Society, Lane focused on a couple of the risks to financial stability singled out in a report by the central bank yesterday, sovereign debt and global macroeconomic imbalances. Amid these prevailing risks, Lane said that Canada’s economic recovery is proceeding somewhat more rapidly than expected.


“Growth has been very strong in the past two quarters, although we expect it to moderate, starting this quarter,” he said, adding that the BoC projects GDP growth of 3.7% in 2010, slowing to 3.1% in 2011 and 1.9% in 2012. Inflation is expected to remain close to its 2% target through this period.

Interest rates remain at a very stimulative level he noted. “But because of the uncertainties — particularly those emanating from Europe — we’ve been careful to emphasize that the extent and timing of any additional withdrawal of monetary stimulus would depend on how the outlook for economic activity and inflation evolves.”

Turning to the risks to that outlook, Lane said that growing sovereign debt is a source of risk for two main reasons. “First, high levels of public debt tend to constrain economic growth. Second, when concerns about sovereign debt become acute — even if they are limited to a few countries — they can have pervasive effects on the financial system,” he noted.

While Europe has been at the centre of sovereign debt concerns lately, Lane noted that many advanced countries will face similar challenges in achieving and maintaining sustainable fiscal positions in the years ahead.

At the same time, he stressed that global imbalances appear to be growing once again, although their nature is changing. “Whereas before the crisis, these imbalances primarily corresponded to unsustainable household spending in the United States, they now increasingly reflect unsustainable government deficits in a number of countries,” Lane said.

“It is because of these risks that the G–20 is placing so much emphasis on policies to achieve strong, sustainable, and balanced growth, in tandem with measures to build a more robust global financial system. The rotation of demand required to achieve such balanced global growth will require policy changes in both deficit and surplus countries. It will also involve adopting greater flexibility in exchange rates, which would facilitate adjustment to both current imbalances and future economic shocks,” he said.

IE