By now, you’re sure to have seen the headlines stating Mark Carney, the current Governor of the Bank of Canada, will be leaving his post for the top spot at the Bank of England. The move is heralded by the Brits at great news – but what does Carney’s departure bode for Canada’s economy?
The Initial Fallout
The Loonie fell dramatically on news early this week that Canada’s top banker is taking a new job. Carney is considered to be somewhat of a banking rock star – after all, he’s the man who kept Canada’s economy and banking system above water during the ongoing global economic turmoil. Now, he’s walking away from this Canadian progress, which he announced in a surprise press meeting on Monday. At the time, he told the press gallery full of reporters, “’It was a difficult decision, but I think it was the right decision.”
Why Carney For England?
As the former managing director of Goldman Sachs and the leader of the G20’s most economically sound nation, the Bank of England was relentless in pursuing him for the top job. Carney had originally turned the post down, but the British central bank was determined that he was the right person for the job. His appointment is not without controversy; he will be the first non-British citizen to lead the Bank and is stepping in when England’s credit and debt problems are at their peak.
Where Do We Go From Here?
For Carney this move is clearly the right decision. He’ll get a pay raise, and will be leading the second most important financial system in the world – and he gets to live in London, England, which some might argue as being a tad more interesting than Ottawa. But it has left many Canadians wondering: what’s next for our economy? Canada is still coasting along with historically low interest rates that haven’t seen a hike in two years. The Canadian economy still remains vulnerable to the debt problems that plague the Eurozone and by the possibility of another recession in the U.S. Some might think we need Carney to stay in his job more than ever right now. Here are a few pros and cons as a result of this management shakeup:
Pro: It Takes an Army of Intelligence
Carney may be the leader who has kept Canada’s banking system from collapsing, but no leader does his job alone. It is the whole effort of the Bank of Canada, its very bright analysts, economists and bankers who have made decisions that have kept Canada out of economic danger. Also Finance Minister Jim Flaherty has been front and centre, limiting Canadians’ ability to borrow, stemming their household debt, and encouraging them to build their wealth. That tone should continue when Carney leaves.
Pro: Change is Good
Canada’s economy is not recovering at the pace that most expected. The overnight lending rate has been stalled at one per cent for 26 months, and we all know the era of ultra cheap money has to eventually end. The longer money remains cheap, the more Canadians are spoiled with unrealistic low debt servicing. A new leader may see a new path for Canada to get back to a normal interest rate environment.
Pro: A Guaranteed Ally
Even though he is moving to England, there is no doubt Canada will remain one of Carney’s top priorities. He is well aware of the negative effect the ongoing debt problems in Europe are having on Canada’s ability to trade and do business with the rest of the world. As he makes the best decisions for the UK economy, it would be hard for him to not consider what affect it would have on the rest of world, especially Canada.
Con: Markets Hate Uncertainty
The Loonie has already been hit hard by news Carney is leaving, and this will extend to the Toronto Stock Exchange as investors wait to see who will lead the BoC next. Depending on how the Bank chooses, it could be a bust or boon for the TSE. It won’t be long before Bay Street starts picking out its favourites to run the Bank – and if that person doesn’t get the job, investors will react by pushing the sell button.
Con: Canada Still Remains Vulnerable
Canadians are in more debt than ever before and cheap money continues to fuel temptation to buy more and save less. Any hike in the interest rate will have an adverse effect on Canadians who are the deepest in debt. Carney has been managing this risk well for the last five years and in particular Canada has seen its housing market remain stable and protected. A leader without Carney’s personal experience may be unable to shield Canadians from bankruptcy when rates start to rise.
Con: Little Fish, Big Pond
The UK is one of the world’s most important economies, second only to the United States. With twice the population and double the debt, Carney’s job will be that much harder. The UK debt problems are also much deeper than Canada’s – their economy is in stagnation while Canada is considered a growth economy. With all the successes that Carney has enjoyed in Canada, and the world wide recognition, England’s debt issues may prove to be too challenging for Carney to handle, threatening his reputation and Canada’s place on the world stage.
Regardless, England is lucky to have Carney to lead its Central Bank, its debt situation needs an outside opinion. Canada will be sad to see its handsome rock star banker go, but Carney will probably be the one that can help lift the UK out of its money problems – which in the long run is good for Canada.