Parsing Mark Carney at third remove

There's much in this CP story that I don't understand. The thrust seems to be that Bank of Canada Governor Mark Carney is making it known that he is more pessimistic about the state of the Canadian economy. It's hard to know what to make of it all.

Why is Bank of Canada's Carney raining on economy's recovery parade? Bank of Canada governor Mark Carney has economists, and perhaps the markets, trying to read between the lines again, if not scratching their collective heads.

The youthful central banker has made three public pronouncements in the past two weeks that have surprised listeners for their foreboding tone on economic developments, particularly since Carney is widely regarded as being in the glass-half-full crowd.

I suppose I'm in that category as well, if only because the OMGWTFBBQ!1!1!!! campsite is full.

In recent speeches in Montreal and Regina, the bank governor was almost dismissive of indicators of economic improvement, warning that whatever good news existed was caused artificially by massive government and central bank stimulus. The private sector "is not there yet," he cautioned.

What government stimulus? The 12-month moving average of federal government program expenditures has been falling since December. (The deficit is due to declining tax revenues.) True, the Bank of Canada's monetary policy is becoming increasingly more effective. Real short-term interest rates are now significantly negative because the threat of deflation is receding.

And in a report from an off-the-record speech Tuesday at the Woodrow Wilson International Centre for Scholars in Washington, Carney broke with official Ottawa dogma in declaring Canada's recession to be as deep as that in the U.S.

Well, if you look at GDI, that sounds about right. When you take into account the hit on our terms of trade, then that comparison is plausible.

The rest of the article consists of reactions to these reports, but there's one bit that deserves comment:

Another sign of trouble is in bond yields, which have pushed long-term mortgage rates up just when the economy desperately needs Americans and Canadians to start buying homes again.

This increase is good news: it reflects the belief that deflation is less likely, that a recovery is more likely, and that the Bank of Canada will be raising interest rates as inflationary pressures return.

Comments

[JKH]

Quite stunning when he came out with a bullish forecast a few months ago; the reversal now seems equally odd. Apart from the economics, it’s a rather bizarre pattern in total. It’s as if he’s attempting some sort of broad brush, countercyclical (contra the herd), quasi moral suasion, expectations stabilization function.

[Stephen Gordon]

I suppose there might be some expectations management going on here. If possible, it's worth trying to talk down the exchange rate and long-term interest rates.

[westslope]

Did Carney ever work on or near a trading desk?

I thought his earlier bullish remarks were inappropriate but in hindsight from the perspective of an active trader, Carney was spot on!