David Rosenberg indicated that the Bank of Canada’s remark on the “path towards a soft landing has narrowed” suggests an increasing likelihood of a recession, which he believes has already commenced. This is evident as the Real GDP reported a decline in the second quarter and appeared to lack momentum entering the third quarter of 2023. Furthermore, the real Gross Domestic Income has been shrinking for the past four quarters. With Canada’s population growth being fueled by immigration, standing at 2.5-3%, the Bank of Canada’s projection of real GDP growth being 1% for two years and 2.5% in 2025 represents a negative growth rate for real GDP per capita over three years.
Ed voiced concerns over the potential emergence of stagflation, a dire scenario characterized by stagnation coupled with persistent inflation. While he acknowledged that persistent inflation might prolong the high rates, Ed emphasized the need to reduce rates, anticipating such a move in the near future.
David pointed out that inflation tends to evolve gradually. Current charts from the Bank of Canada display moderating inflation expectations, though at a snail’s pace. He believes that absent certain flawed elements in the Consumer Price Index (CPI), inflation would be nearly on target. The Bank should contemplate rate reductions, but it appears their own pride hinders this.
Ed expressed skepticism about the prevailing market anticipation regarding rate cuts, deeming them overly cautious. He forecasted a shift in the currently inverted yield curve and anticipated aggressive rate cuts from the central bank. He also highlighted the unpredictability of quantitative tightening. With real interest rates for 10-year notes currently at 2.5%, he questioned how long central banks would be willing to support such rates and pondered the demand elasticity for bonds once government support wanes.
The interview finished on the topic of housing, with David underscoring that housing supply isn’t governed by monetary policy but by fiscal and regulatory measures. He echoed the Bank of Canada Governor Tiff Macklem’s sentiments on aligning fiscal with monetary policies, suggesting that the era of fiscal expansion might be behind us. He reasoned that if home prices were to decrease, it would facilitate the Bank of Canada’s task of slashing interest rates. Drawing attention to the static unemployment rate since January 2020, which stands at 5.5%, he contrasted it with the steep climb in the policy rate from 1.5% to 5%. Given the current restrictive policy framework, he championed fiscal interventions to alleviate housing prices. Both he and Ed concur that aggressive rate cuts by the central bank are on the horizon in the not-too-distant future.