Thank you, Mr. Chairman.
Thank you to the members for inviting me here today.
There's no doubt that the world economy has been faced with numerous challenges since the start of 2011. It started this year with the crisis or the unrest in the Mideast that led to a spike in energy prices. Of course that was followed by Japan's trio of disasters that created supply chain problems globally. Then, in the summer, we were faced with the U.S. debt limit debate, which sparked turmoil in the financial markets more generally. Rumbling beneath all of these challenges has been the ongoing European debt crisis, which is probably now the single biggest risk to the global economic outlook.
All of these factors have in their own way conspired to no doubt darken the economic outlook. Through one channel or another, they have hit consumer, business, or investor confidence.
While we continue to believe that Canada and the U.S. will manage to claw out some growth over the next year, it looks to be very modest at best. We've recently revised our GDP forecast down to 1.5% to 2% for both Canada and the U.S. in 2012. That's not significantly different from the problem-plagued, underwhelming environment we've seen in 2011. It is down about a percentage point from where we would have seen both Canada and the U.S. as recently as four months ago.
Given such subdued growth, I would say that it would really only take one more negative shock to basically tip the economy over into an outright downturn--for instance, a serious policy error in one of the major economies, or something akin to the Lehman Brothers shock we suffered back in the fall of 2008.
For Canada specifically, we have consistently outperformed the U.S. and most of our global counterparts for the last five years. On average, the Canadian economy has grown by about half a percent faster than the U.S. economy, but I would stress that it really is only a difference of degree and not direction. The reality is that if the U.S. and the broader global economy got into significant difficulties, then Canada would unfortunately only be a step behind.
Even from Europe, there are a number of different channels through which a problem in the European economy can be transmitted to the Canadian economy. There is the direct export channel. Admittedly, Europe is not a huge destination for our exports, but they do still absorb about 8% of our total exports, which is by itself significant.
There is also the financial market channel. Much as we've seen in recent weeks, global equity markets are more interlinked than ever before. Whenever we suffer serious downdrafts, even in European equities, that can directly affect Canadian equities that very day.
There are the financial linkages through the banking sector. If European banks get into serious difficulties, that can affect the North American economy.
Finally, there is the indirect effect of commodity prices. We've certainly seen that in recent weeks. Concerns over the global economy can translate into much weaker commodity prices. We've seen that quite clearly in recent weeks, where we've had a huge step back in commodity prices. Of course, as a significant commodity producer and exporter, a significant drop in commodity prices at this time too can affect the Canadian economy.
In other words, even if we do everything right, even if we get every policy right, we can still be obviously quite clearly affected by a problem in the global economy.
As well, the Canadian dollar is vulnerable to a pullback in commodity prices, as we have seen in recent weeks.
For policy-makers, I'd suggest that in this kind of environment, caution really is the watchword. Certainly from the monetary policy front, we have seen the Bank of Canada on hold for the last year. Our view is that the Bank of Canada is likely to keep interest rates unchanged right through to the end of 2012. They will remain quite cautious in this kind of environment.
For fiscal policy, I think the important thing at this point is to be flexible. I don't think things have deteriorated to the point where we need a change of tack at this point, but I think policy-makers have to be cautious in this kind of environment where there are quite serious tail risks. I mean, right before our eyes we see the risks playing out in financial markets. It's almost as if we're having a day-by-day debate in the financial markets on whether we're headed for another global recession or whether or not the global economy will continue to turn out modest growth.
In that extremely uncertain environment, I think fiscal policy basically has to remain flexible. That's my main message.
Thank you.