A veteran Bay Street economist says the Canadian economy has slowed more than enough to justify an interest rate cut by the Bank of Canada, and that underlying inflation may be lower than the central bank thinks.
“I think that the Canadian economy is pretty well flat on its back,” David Rosenberg, founder and president of Rosenberg Research, told BNN Bloomberg in a Thursday interview.
“Unlike in the U.S., where real GDP (gross domestic product) growth is over three per cent year-over-year, it's 0.9 per cent here… 0.9 per cent with population growth of 3.2 per cent, so in real per capita terms, the decay in Canadian economic activity is just continuing.”
Rosenberg said that despite the Bank of Canada acknowledging at its last rate decision that the economy has moved from a state of excess demand to one of excess supply, the bank still hasn’t made any commitment to lowering rates.
“What are they waiting for? They certainly should not be waiting for the (U.S. Federal Reserve),” he said.
“It wouldn't be the first time that the bank went on its own when economic conditions dictate that they should… but they should be striking now.”
Rosenberg’s comments came after Statistics Canada reported a Canadian trade deficit of more than $2 billion in March, well off the $1.21 billion surplus that analysts surveyed by Bloomberg were expecting.
The news came on the heels of GDP data released by StatCan earlier this week, which suggested economic growth in Canada was mostly flat in February and March.
These readings have further fuelled bets that the Bank of Canada will lower its key interest rate at its next policy decision in June, with most Bloomberg-tracked economists now expecting a 25-basis point cut.
However, some economists think the central bank will continue to be cautious in light of the economic situation in the U.S., where rate-cut bets have now been pushed until the end of the year or beyond due to persistent inflation.
Rosenberg said he believes those concerns are overblown, as the way in which Canada measures its consumer price index (CPI) is “totally different” than in the U.S., adding that “you can’t compare the two countries.”
He argued that when the most volatile components are stripped out of Canada’s CPI, the country’s inflation levels are already at, or close to, the Bank of Canada’s two per cent target.
Rosenberg added that by keeping its key interest rate at five per cent until now, the Bank of Canada will be forced to cut rates more aggressively over the next year, which will put significant downward pressure on the loonie.
“When it comes time to cut, by waiting so long, they're going to cut harder, so they're going to make the same mistake twice in different directions… the longer they wait, the more they're going to have to do,” he said.
“The reality is that underlying inflation, properly measured in Canada, is already on target, and the economy is building up excess capacity. You don't need an economics degree to know that that's going to lead to further disinflation ahead, so (the Bank of Canada) will be scrambling hard.”
With files from Bloomberg News