David Rosenberg: The Bank of Canada may rue its recent interest rate hike

David Rosenberg: The Bank of Canada may rue its recent interest rate hike

Areas of the economy most sensitive to rates already seem to be in recession

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There are lies. There are damned lies. And then there are statistics. To paraphrase Mark Twain.

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What is tough to figure out here is why the Bank of Canada thinks it can pull the wool over our eyes. One of its rationales for hiking rates rather unexpectedly last week and threatening to do even more (after taking out the John Crow tightening phase of the late 1980s when inflation was a far more serious problem) is that the Canadian economy has become more immune to interest rate hikes than it had thought. What? If anything, the areas of the economy most hitched to the central bank’s policy seem to already be in a recession or quickly heading there.

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The Bank of Canada focuses on the quarterly averages from the gross domestic product data (on the spending side), but doesn’t seem ready to comment on the decay coming from the contours of the monthly numbers. In aggregate, the interest-sensitive segments contained in the monthly real GDP data (manufacturing, residential construction, real estate, financial services, retail and wholesale sectors) contracted 0.3 per cent in March after a 0.2 per cent retreat in February, and this aggregate has been flat or down sequentially in 11 of the past 12 months. The year-over-year trend was one per cent a year ago and has since swung to minus 1.5 per cent currently, the most negative it has been since June 2020.

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Policymakers seem impressed with the Canadian consumer, but not every figure is coming up smelling like roses. The retail sector, in volume terms, contracted 0.8 per cent in March atop a 0.6 per cent decline in February in the steepest successive setback since April-May 2021. Spending here is lower today than it was last June. That classifies as impressive? Maybe if you’re a masochist.

The wholesale trade industry fell 0.6 per cent month over month in March after being down 1.2 per cent in February. It has been reversing in four of the past five months and running at minus 1.8 per cent on a year-over-year basis. Financial services are down in two of the past four months, and down fractionally (minus 0.3 per cent) year over year.

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Residential construction — the most credit-sensitive of all — sagged 1.1 per cent in March and is riding a five-month losing streak. The minus 15-per-cent year-over-year trend is the worst since April 2020, and the actual level of real expenditures has dialled its way back to where it was in May 2020 when the Bank of Canada, like the United States Federal Reserve, was assuring everyone that rates were not going up for many years. Nice call. Finally, manufacturing activity declined 0.6 per cent in March and is off 1.1 per cent on a year-over-year basis.

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I sense the Bank of Canada will rue the day it pulled the stunt it did on June 7. Most of all, I question the analysis and the conclusion that somehow the rate-sensitive sectors are holding up just fine in the face of the most acute tightening program since 1981.

You can have your own opinions, to be sure, but you can’t have your own facts. And the central bank is definitely not taking a complete view of what is happening in the economy, perhaps because it needs “cover” in its quest to quickly achieve that holy grail, but basically irrelevant, two-per-cent inflation objective.

David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website.

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