A shifting economic context will compel the Bank of Canada to cut interest rates next, according to Gluskin Sheff + Associates chief economist and strategist David Rosenberg.
“We just came off two straight quarters of negative growth in real final demand. So, if we’re not in a recession yet, we’re just basically one notch away,” Rosenberg told BNN Bloomberg in an interview earlier this week.
“So, what’s the Bank of Canada supposed to do in that environment? You first move away from your tightening bias to a neutral bias, which they’ve done. Now, they’re talking, at the margin, slightly more dovishly, and the next move for an incremental central bank would be to start cutting interest rates.”
Prior to its interest rate hold decision earlier this month, the BoC has raised rates five times from July 2017 to October 2018.
In addition, other institutions will likely follow suit to adapt to the changing economic conditions. Among the most important of these would be the U.S. Federal Reserve’s possible decision to make a cut in the second half of 2019 – a decision that will certainly reverberate north of the border.
“My sense is that the Fed is going to be continuously surprised, as they already have, by the contours of U.S. economy. We bought a little bit of time, got a little bit of growth last year, because of the fiscal stimulus – that’s basically over,” Rosenberg explained.
“The recessionary conditions in other parts of the world are going to hit home … My bet is that the Fed is going to be very surprised at how the weak the U.S. economy turns out this year.”
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A critical factor in the shifting sands of economic stability is the “stagnant” labour market, despite considerable employment gains last month.
“What’s happening here is that the focus in Canada seems to be just strictly on the pace on job creation, and nobody seems to be focusing too much on the fact that, although we’re hiring more people, we’re all basically spending less time at work,” Rosenberg stated.
“The work week was actually down 0.7% last month. If you actually look at that in body terms, it’s as if we lost 130,000 jobs just by the fact that we were working so much less.”