Thank you very much. I'm going to be relatively brief.
I think the real measure of intelligence is what you do when you don't know what to do. I think Bernanke in the U.S. and Carney here in Canada will tell you that they don't know what to do, because that's the way they discuss the situation. Both of them have told us that the situation now is described as an “unusual uncertainty”, which means that there is significant room for error, one way or another.
If you look at the consensus, the so-called consensus, among economists, you will see that there is a wide range between the optimists and the pessimists. Even the finance minister admitted that there is a significant level of uncertainty as far as the economy is concerned.
The question is what to do when you don't know what to do. The answer is to not overreact, first of all, and to not make mistakes. I think this kind of environment suggests that we should be prudent as far as the budget is concerned.
If you look at the U.S. economy, you see a situation in which the housing market there is really struggling in a very significant way. If you look at the real estate market in Canada, you see that it's slowing down significantly. If you look at China, you see that it's slowing.
You see so many things that are missing at this point. Government money was artificially stimulating the economy in the first half of the year, and now this government money is not available, on both sides of the border. To me this suggests that the economy will slow down much more than was expected six months ago. This means that we will face a shortage of revenues over the next 12 months, with the economy growing by only 1.9% in real GDP and maybe 3.5% in nominal GDP, where you derive the revenues from.
Clearly we are entering a very, very challenging period as far as the economy is concerned. And it's not just Canada; it's the U.S., it's China, and it's definitely Europe. It's a global slowdown that will have significant implications for the Canadian economy and the budget situation. Add to it the provincial shortcomings in terms of budgets and you see why we should be prudent.
What does it mean? It means, first of all, that the Bank of Canada should be extremely careful not to raise interest rates too aggressively. Why? Because our consumers are stretched.
The main reason why the Canadian economy was able to outperform the U.S. was the fact that monetary policy in Canada was extremely effective. You have a situation in which consumer confidence in Canada is only 20% below the rates we saw during the happy days of 2007. In the U.S. it is 60% below. If you live in the U.S. and you're not sure about your job tomorrow, and I can give you a zero-percent mortgage, you will not take it. In Canada you will jump on it. That's why Canada was able to outperform. When the Bank of Canada cut interest rates, we got much more stimulus out of it. That's why in the process we had the situation where we had not only the best financial sector in terms of the ability to provide credit but also the strongest consumer sector in terms of the ability to accept this credit.
So we were shooting from both directions, and in the U.S. they were not shooting at all. That's why we were able to outperform. Monetary policy in Canada was extremely efficient.
The problem is that in this process we have accumulated a significant amount of debt. The debt-to-income ratio in Canada is 146%. This is a major challenge. It means that as a society we have become much more sensitive to any economic shock, including higher interest rates. I estimate that we are 40% more sensitive to higher interest rates than we were ten years ago. That is why the Bank of Canada should be very careful.
Thank you.