Nouriel Roubini, the New York University economist who accurately predicted the U.S. housing slump would trigger a recession, said the Bank of Canada should take a stronger line on monetary policy to weaken the currency and spur the economy.
“I would use more aggressive monetary policy to weaken the currency,” Roubini said at a lunchtime event at the Toronto Hilton, referring to the Canadian dollar. “That’s what I would do. More than fiscal stimulus I would say a commitment to keep rates low for longer, or having an easing bias, something along those lines.”
The loonie, as Canada’s currency is sometimes known, has lost 4 percent this year versus the U.S. dollar, the worst performance among Group of 10 countries, after Bank of Canada Governor Stephen Poloz dropped a bias toward raising rates. Roubini said a 10 percent decline in the Canadian dollar would help manufacturing exports and minimize the risk of that sector of the economy disappearing permanently.
“It may not be conventional wisdom right now but I’d say keeping your currency weaker right now is important,” Roubini said. The Canadian dollar appreciated 0.4 percent to C$1.1062 per U.S. dollar at 3:12 p.m. in Toronto.
An oil boom in western Canada and global demand for commodities helped drive the loonie beyond parity with its U.S. peer in the last decade as employment in the resource sector increased 33 percent, according to data compiled by Bloomberg. In the same period manufacturing employment has fallen 23 percent.
“The resource boom has lead to a strong currency that’s crowding out manufacturing,” Roubini said. “That’s a form of Dutch disease and that could be a long-term problem.”
Dutch disease is a term coined in the 1970s to refer to the Netherlands’ uneven economy after natural gas deposits were discovered in the North Sea. The resulting rise in the country’s currency was blamed for the demise of Dutch manufacturing.
The need to weaken the currency to stimulate growth must be weighed against the dangers of inflating asset bubbles further by keeping borrowing costs low, he said. Roubini pointed to Canada, along with the U.K. and Norway as countries where housing markets are showing some signs of a bubble.
Canada’s housing market is due for a correction that will hamper economic growth as consumers pare back spending to repair their balance sheets, Roubini said, adding he doesn’t think the country will see a home-prices crash.
Slower consumer spending along with oil prices that will probably fall 10 percent over the next two years on growing global production will mean Canada’s economy may grow between 2.3 percent and 2.4 percent in 2014.
Roubini’s call for Canada is in line with the 2.3 percent growth forecast in a Bloomberg survey of economists, another sign that after warning on his blog in early 2007 of impending economic collapse, the contrarian’s latest forecasts are coming in closer to the consensus view.
In a Dec. 31 post on the website Project Syndicate Roubini predicted industrialized countries will post 1.9 percent growth this year, close to the 2.1 percent rate among Group of 10 nations forecast in a Bloomberg economist survey.
Among industrialized countries, Roubini sees some of the greatest headwinds in the euro area, where he said risks of deflation mean an increased possibility the European Central Bank will cut interest rates by the end of the year.
Roubini said even though China, the world’s second largest economy, will grow at about 7 percent this year, there are risks of a hard landing next year, with growth slowing to 6.5 percent and 6 percent year after, as entrenched interests who have benefited from the country’s debt and investment driven growth model resist the transition to consumer spending-led growth.
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