Economic Update December 2012 | will keep it short, As | have hinted in previous updates, the global economy is slowing down rapidly, due in the main to Europe's recession and the failure of oil prices to respand to falling demand. Governments will be accused of causing the malaise, but in the main it is due to the de-leveraging of balance sheets by banks, companies and, to a lesser extent, households. This sort of adjustment is a once-in-a-generation event, Governments and Central Banks have grown their balance sheets to mitigate the impact an growth and employment. They have been largely successful; things could have been a whole lot worse. But the actions they have taken are on top of the impact of ageing populations in the West which were already straining national budgets. The deficits currently racked up by Governments will persist for years, but remember absolute size is not the problem - although the cost of financing can be What Mark Carney, the new Governor of the Bank of England will find in June 2013 Some of the UK media have presented the new Governor of the Bank of England as a unique saviour who will ensure the UK retums to stable, non-inflationary, growth. Really? Camey got the job in Canada after their Government had created tight rules for Canadian Banks in 1998. A restrictive structure was already in place, which is why Canada did not experience asset price bubbles. Until now that is,Ratio of household debt to personal disposable income 180 80 L L L L L 1 1 1 11 60 1980 1984 1988 1992 1996 2000 2004 2008 2011 —Canada ——United States ——Euroarea —==United Kingdom As you can see from the chart, Canada is in a house price bubble; household income leverage is now greater than the UK or USA. However, total mortgage debt at 68% of GDP is still well below the UK's 100% Mark Camey should be raising Canadian interest rates. They are currently 1%. My guess is 5% would be needed to dissuade would-be borrowers. It will be a big test for Camey and his Committee. The basic rule for the correct rate of interest is to take real growth in GDP and add 2.5%. But will they do it? No. especially as demand for Canadian exports is weakening with the global slowdown. Watch this space.Chart 26: House prices in Canada are very high relative to income . .- Rato of Teranet-National Bank house price index to household cesposabia ncome* Home Prices: U.S. vs. Canada January 2000 to July 2011 hiller Composite-20 Index eranet National Bank Index t 2000 "002 "004, "2006 2008, 2010,