As group head of Canadian banking for RBC Royal Bank, David McKay spends plenty of time on the road — travels that allow him to assess the economic mood across Canada.
Right now, he says, things are pretty upbeat in Alberta.
“It’s palpable, the confidence,” said McKay, who was visiting the Royal Bank’s new branch at Clearview Market Square in Red Deer on Thursday.
The same is true in Saskatchewan, and Newfoundland and Labrador, he added.
“You don’t feel it in Ontario as much, or Quebec.”
In those provinces, the high loonie continues to weigh down the manufacturing sectors. But McKay doesn’t blame petroleum exports for Canada’s inflated currency — a phenomenon dubbed Dutch disease.
“The reality is, we’re going to have to learn to compete. And if we do build competitive industries around a dollar at par, we’ll never have to worry about it going down.
“So, in the long run, it’s probably a good thing for our economy; in the short run, there’s tremendous dislocation.”
Some manufacturers are adjusting, taking advantage of the high dollar to buy more efficient equipment. In fact, noted McKay, gross output from Ontario’s manufacturing sector has gone up — even though job numbers are down.
GDP growth in Alberta this year is expected to hit four per cent, with Saskatchewan even higher, said McKay. But the average for Canada is projected at between two and 2 1/2 per cent.
This is lower than it should be for a post-recession economy, he said, suggesting that ongoing concerns about the European debt crisis is slowing domestic growth.
“Business leaders require certainty, and certainty leads to investment and growth; uncertainty leads to slower growth and lack of investment.”
In fact, Canadians have no direct exposure to Europe’s financial woes, and are even benefitting from the Bank of Canada keeping interest rates low to stimulate investment here.
“If Europe was to stabilize, you’d see rates go up.”
The financial situation in the United States remains a concern, said McKay, with the government there reluctant to adopt austerity measures.
“The challenge is the government is trying to stimulate the economy before they deal with the fiscal balance. They need at some point to raise taxes and decrease benefits.”
On the Canadian housing front, McKay downplayed the risk of a U.S.-style market collapse.
Prices have been driven up in Vancouver by foreign investment, he said, and in Toronto by a shortage of developable land and an influx of immigrants. But homeowners here are not exposed like their counterparts to the south were.
He explained that Canadian banks must show mortgages on their balance sheets, whereas American institutions were able to package them for sale as securities — reducing the incentive to ensure the soundness of such loans. Additionally, said McKay, the tax deductibility of mortgage interest in the United States encouraged irresponsible borrowing, and there wasn’t a requirement for insurance on high-ratio mortgages, as there is here.
Even if interest rates do jump, he said, many Canadian homeowners are now locked into long-term mortgages at a fixed rate.
“They’ve insulated themselves for the next five years.”
McKay also pointed out that consumer debt appears to be under control, with its growth over the last six months well below the long-term average.
Debt levels of older people approaching retirement is a concern, he acknowledged, although many are now seeking professional advice.
“Canadians are underestimating how long they’re going to live; Canadians are underestimating how much they’re going to have to save to retire.”
Two weeks ago, McKay was named Retail Banker of the Year by international industry publication Retail Banker International. The award was based on outstanding performance and leadership.
Retail Banker International also chose RBC Royal Bank as the Best Bank in North America.