Canada's Economy on 'Life Support' Despite Rate Cuts: Economist Warns of Recession Risk
A stark new economic report has placed Canada on recession watch, with a prominent economist declaring the nation's economy is effectively on life support despite significant interest rate reductions. The analysis from Rosenberg Research paints a concerning picture of economic stagnation that demands further policy action.
Per Capita GDP Fails to Respond to Monetary Policy
The report, titled Canadian Economy on Life Support, reveals a troubling reality: despite the Bank of Canada cutting interest rates from a high of 5% in 2024, the country's per capita gross domestic product continues to underperform. The overall economy is growing at a mere 1% annually, a figure that economist David Rosenberg finds alarmingly insufficient.
"What does 275 basis points of Bank of Canada rate cuts deliver? The grand total of one per cent growth economy," Rosenberg stated in an interview with BNN Bloomberg. "Is that all you get?"
Key Economic Sectors Show Significant Weakness
The manufacturing and housing sectors demonstrate particular vulnerability according to the research. Manufacturing has declined by 5% annually, while housing has fallen by 2% annually. These contractions occur despite expectations that rate cuts would stimulate housing inflation and construction activity.
"Residential construction expenditures are flat in the last year," Rosenberg noted. "Home prices in Canada have either been flat or negative sequentially for 10 months in a row and are running -2% year over year."
Fourth Quarter Contraction and Recession Watch
The Rosenberg Research report projects Canada's economy will shrink in the fourth quarter, falling by an annualized 0.5% quarter over quarter. This contraction exceeds the Bank of Canada's forecast of 0.0% growth and follows economic declines in two of the last three quarters.
With this pattern of contraction, the report formally places Canada on recession watch for the current year, suggesting the economy has entered a precarious phase requiring immediate attention.
Inflation Concerns Diminish as Growth Lags
Rosenberg emphasized that inflation in Canada "is not really an issue" at present, with virtually every underlying inflation measure falling within the Bank of Canada's comfort zone. This creates space for further monetary policy intervention without triggering inflationary pressures.
The economist argues the Bank of Canada must cut rates further from the current 2.25% level, as the economy continues to grow below its potential. He anticipates the Canadian dollar will face downward pressure as a result of these necessary adjustments.
International Trade Relations Compound Domestic Challenges
External factors further complicate Canada's economic outlook. Despite hopes for improved relations with the United States, trade tensions have escalated as former President Donald Trump threatens additional tariffs. Simultaneously, Canada's discussions with China regarding a trade deal have introduced new uncertainties.
These strained international relationships occur alongside a competitive exchange rate and strong economic growth in the United States, yet Canada's manufacturing sector continues its 5% decline.
Currency Comparison Reveals Underlying Weakness
Rosenberg suggests Canadians should evaluate their currency against commodity-oriented counterparts like Australia and New Zealand rather than traditional benchmarks. By this measure, the Canadian dollar has dropped more than 4% in the last two months.
"It's telling you that they have higher interest rates because they have stronger internal demand," Rosenberg explained. This comparison raises fundamental questions about whether Canada's current interest rate policy is effectively supporting credit-sensitive sectors like housing and construction.
The economist's conclusion is unequivocal: despite significant rate cuts already implemented, the Bank of Canada "haven't done enough just yet" to revive an economy that remains on life support and dangerously close to recession territory.
