by Jozef Rynik
WBP Online Correspondent in Ottawa

The Canadian economy is relatively healthy, but there are some signs of illness. “Our economy cannot … depend indefinitely on debt-fuelled household expenditures, particularly in an environment of modest income growth,” Mark Carney, the Bank of Canada governor, said to a business audience at a conference held by the Atlantic Institute for Market Studies in Halifax on Thursday.

The governor is mainly concerned about the housing market. “Housing investment rose further in the first quarter, accounting for an unusually elevated share of the overall Canadian economy,” he added.

Playing with rates

Carney also repeated that if the current economic expansion in Canada continues, the central bank could withdraw monetary stimulus that eventually would lead to a raising of the interest rate. The benchmark interest rate has been sitting at 1% since September 2010. Banks analysts expected that central bank would keep interest rate untouched to next year or even till 2014.

In April, Carney also warned of piling household debts that he sees as the biggest domestic risk to the economy recovery. The governor warned borrowers to make sure they’ll be able to afford any loans once interest rates start rising. “If you borrow, make sure you can sustain your payments even when interest rates go up. And don’t rely on the assumption that prices of houses will grow forever,” said Carney.

Concerns about Europe

In Halifax, Carney repeated his concerns about the global recovery and risk of the European debt crisis. “Some of the risks around the European crisis are materializing and now the outlook is skewed to the downside, which means it is more likely the situation will get worse than improve,” he said.

The Bank of Canada governor noted that the European financial system has aggressively renationalised in recent months. “Intra-European cross-border lending - which had been growing by 25% per year in the run-up to the crisis - has been falling at a rate of 10% per annum since.”

He added that reliance on central bank lending is not a recipe for robust private investment. Mark Carney in his speech called on an end to the too-big-to-fail rule. “We must address, once and for all, the unfairness of a system that privatizes gains and socializes losses,” he said.

The situation is Europe is closely connected with other world economies. Slower growth of the global economy could cause lower commodity prices, that Canada exports. “Given the reality of global finance, it is not enough to have our house in order unless we seal ourselves off from the world. And if we do that, we will end up much poorer,” he added.

To contact the author of this story e-mail jozef.rynik@wbponline.com