Bank of Canada Governor Mark Carney Tuesday described the slack in Canada's labour market as "considerable," reinforcing the widely held view that the central bank will keep interest rates low to stoke economic growth.
In testimony before the House of Commons Finance Committee in Ottawa, Mr. Carney took a nuanced view of Canada's jobs performance, which has bested that of most major industrialized economies in the years following the financial crisis.
While Canada has replaced all the jobs lost in the recession and then some, Canadians aren't working as many hours as would be expected if the economy had achieved full employment, Mr. Carney said. That will limit consumer spending, and helps explain why the economy is struggling to grow at an annual rate of 2 per cent.
"There is slack in the labour market," Mr. Carney said. "It still is considerable."
Canada's unemployment rate dropped to 7 per cent in January from 7.1 per cent the previous month, but only because fewer people sought work. Statistics Canada reported last week that employers cut 21,900 positions to start the year, the first decline in six months.
Many Bay Street and Wall Street economists have been predicting Canada's impressive hiring streak is due to end, a point of view that the central bank has done little to discourage.
The Bank of Canada has left its benchmark interest rate at the ultra-low setting of 1 per cent for more than two years, and most analysts say it will stay there at least until early next year. Policy makers last month conceded that Canada's economy is growing slower than they had expected in the autumn, and indicated an interest-rate increase would be delayed as a result.
Canada's economy performed relatively well in the aftermath of the financial crisis, as low borrowing costs spurring a credit boom, much of which was used to buy houses.
But with household debt at record levels, consumers are beginning to pullback, which is causing the housing boom to deflate to more normal levels. That's good for financial stability – Mr. Carney noted Tuesday that Canadians "are listening" to his repeated warnings about the dangers of taking on too much debt when financing costs eventually will rise.
Yet that leaves Canada's economy without a growth engine. Mr. Carney and his top deputy, Tiff Macklem, told lawmakers that Canada will struggle until exports and business investment pick up. If they don't, Mr. Carney said the central bank's current projection for economic growth of 2 per cent in 2013 will be too high.
Mr. Carney, who will leave Canada in June to take over as governor of the Bank of England, was making one of his last appearances on Parliament Hill. None of the finance committee's members asked about his decision to leave Canada, although several thanked him for his service and said they would "miss" him.
The testimony, which lasted for two hours, broke little new ground, but added important nuance to central bank's thinking.
While the Bank of Canada revised its outlook for U.S. economic growth in 2013 to a slightly lower 2.1 per cent in January, Mr. Carney said Tuesday that he was encouraged by the "quality" of U.S. growth, noting the strength in the housing market and stronger consumer confidence. Both factors auger well for more sustainable growth over the next few years, the governor said.
Mr. Carney also was pulled into the "currency war," a narrative that had so taken hold in foreign-exchange markets that the Group of Seven nations, which includes Canada, on Tuesday issued a statement reiterating its support for flexible exchange rates and disavowing the use of fiscal and monetary policy to influence currency prices.
At the centre of the "currency war" debate is Japan, where the government has introduced new stimulus measures and the central bank has adopted an inflation target of 2 per cent to break the country's two-decade cycle of deflation.
The yen has plunged considerably in recent weeks, causing some to suggest that is Japan's goal. Japanese authorities deny that's the case.
Mr. Carney appeared to defend Japan, calling the country's new economic policies "very positive." He also noted the Japanese government "have agreed to acknowledge" that monetary policy should be focused on domestic outcomes, not the foreign-exchange rate.