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# David Rosenberg: Tanking economy, productivity mean Bank of Canada
should cut rates with or without the Fed
Canada can cope with a weaker dollar; in fact the country needs it
Published May 07, 2024 • Last updated May 07, 2024 • 4 minute read
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Bank of Canada governor Tiff Macklem, left, should not wait for
Federal Reserve chair Jerome Powell to cut rates, says David
Rosenberg. Photo by Getty Images
## Article content
We find it rather incredible that the Bank of Canada is so nonchalant
when it comes to the state of the Canadian economy. The degree of
excess capacity is expanding by the month, inflation has swung to
disinflation and the economy (in real output per-capita terms) is
contracting at a two per cent annual rate. Yet the folks in Ottawa
fiddle as the macro landscape burns.
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Business insolvencies have soared 87 per cent over the past year to
the highest level since the peak of anxiety in 2008 when the global
financial crisis was raging. The number of people entering the labour
market without landing a job has practically doubled those who found
one over the past year. That has resulted in more than a 20 per cent
year-over-year surge in the ranks of the unemployed and it seems
amazing to think that Bank of Canada officials are unaware of that
statistic.
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Any concerns over a resurrection of the housing bubble should be put
to rest by now, with home sales in the once-hot Greater Toronto Area
chilling 3.4 per cent month over month in April, losing ground in each
of the past three months and down five per cent from year-ago levels.
At the same time, new listings have ballooned 47 per cent year over
year, and this new demand-supply backdrop has created the conditions
for a flattening out in residential real estate prices.
Now that shelter costs are beginning to stabilize in real time, it
won't be long before its inflationary effects fade from the consumer
price index data because the headline inflation rate in Canada, absent
the housing component, is running at a grand total of 1.5 per cent,
melting before our very eyes from 3.9 per cent a year ago and 6.6 per
cent two years ago.
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If you don't think the Bank of Canada can cut rates without help from
the United States Federal Reserve, think again. This happened in
1996-1997, 1999 and 2003-2004. How far can it deviate? Well, let's
just say that in early 1997, with the Canadian economy heading into a
different orbit than the U.S. under the budget belt tightening by the
Jean Chrétien-Paul Martin dynamic duo, the overnight rate in Canada
got as low as three per cent while the Fed funds rate was pinned at
5.5 per cent. There is precedent.
As for the Canadian dollar, well, sure, it will depreciate, and in two
of those prior periods of monetary policy divergence (1999 and 2003),
it took almost $1.50 to buy a U.S. dollar. What of it? The economy
needs stimulus and currency depreciation is one key to easing domestic
monetary conditions. Besides, we are so damned uncompetitive in this
country, with negative productivity growth and no capital deepening at
all for well over a decade, that unit labour costs in U.S. dollar
terms are running at five per cent year over year, which compares very
poorly to the 1.8 per cent trend south of the border.
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Even without the Bank of Canada going its own way, the country sadly
needs a weaker exchange rate as an ongoing crutch just to realign our
cost structure with the U.S. and stem the tide of net direct
investment outflows. In other words, we are sure nobody is even aware
of the dramatic erosion that has taken place when it comes to net
direct investment (this is "bricks and mortar," not paper securities),
but there has been a net outflow of real capital out of the country
each and every year since 2014 totalling nearly $400 billion (more
than $50 billion alone in 2023).
This is why the Canadian dollar remains in a fundamental bear market
and why it is that even in periods when oil and industrial commodities
hook up, there is a muted Canadian dollar response. It is not because
the "terms of trade" effect is broken as much as it has been weakened
by this relentless decay in domestic competitiveness relative to the
U.S.
In other words, we have to cut our prices internationally just to
protect our share of the global export market, and in the process, the
nation is compelled to accept a wage cut, and there was nothing in the
recent federal budget to address this chronic shortfall in terms of
domestic competitiveness.
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It would be funny if it weren't so sad that economic documents such as
the budget turn into political manifestos aimed at buying votes in the
name of "fairness" over "growth."
How is it that the Liberals are so adept at divvying up the national
income pie instead of thinking creatively to expand it. It's as if the
term "productivity" to the politicians, bureaucrats and mandarins in
Canada is a dirty 12-letter word. Better to pursue supply-side growth
through an unprecedented immigration policy stance (never mind that
there has been no economic payback, judging by the continuous
contraction in real output and income in per-capita terms) than embark
on measures to bolster productivity growth, which is the mother's milk
for future prosperity. But why bother when nobody outside the realm of
economics even understands what productivity means, and it's neither
an attention grabber in election campaigns nor a vote getter at the
polls.
Brian Mulroney and Michael Wilson got it. Chretien and Martin got it.
But Justin Trudeau and Chrystia Freeland? Not so much.
_David Rosenberg is founder and president of independent research
firm Rosenberg Research & Associates Inc. To receive more of David
Rosenberg's insights and analysis, you can sign up for a
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