TORONTO (Reuters) - Austerity drives in wealthier countries could significantly shrink the global economy if not accompanied by increased Asian demand and a stronger Chinese currency, the Bank of Canada said on Tuesday.
Model simulations suggest a loss of more than $7 trillion to the world economy by 2017 under such a scenario, said John Murray, deputy governor of the central bank, in a speech.
"Fiscal consolidation and the repair of household balance sheets are necessary and inevitable, but doing them quickly, unassisted by growth from elsewhere, deepens global deflation," Murray said.
Murray was referring to a pledge by the Group of 20 emerging and rich nations to eliminate gaping imbalances in the global economy characterized most starkly by large current account deficits and surpluses in the United States and China, respectively.
To fix those imbalances, G20 leaders agreed that a series of policies are needed. They include a gradual fiscal tightening in advanced economies -- something countries like Britain and Canada have begun in earnest. Other measures include boosting the U.S. savings rate and allowing the Chinese currency to appreciate materially while stimulating domestic demand in China and emerging Asia countries.
Murray warned, though, that many advanced economies were being forced to undergo fiscal restraint more quickly than conditions warrant by an "increasingly skeptical and impatient market 'vigilantes'."
"Doing half the job, in other words, is worse over the short- to medium-term than doing nothing," he said.
Murray made no mention of Canadian monetary policy in his speech. The Bank of Canada has frozen its key interest rate at an ultra-low 1 percent for the past 15 months and in October downgraded its growth forecasts to reflect the impact of the European debt crisis and weak U.S. economy.
Editing by Jeffrey Hodgson