Nouriel Roubini said the value of the Canadian dollar is too high, given the need to keep the country’s manufacturing sector intact.Fred Lum/The Globe and Mail
Nouriel Roubini, the bearish economist known as Dr. Doom, is now moderately enthusiastic about the Canadian economy, although he thinks our dollar should be 10 per cent below where it is now.
Mr. Roubini, speaking to a Bay St. crowd at a meeting of the Economic Club of Canada in Toronto Monday, said Canada's economy is "doing okay, [but] not exceptionally." While growth of 2.3 or 2.4 per cent is expected this year and will go a bit higher next year, there are challenges, he said. First of all, commodity prices expected to decline, while the resource boom has led to a relatively high dollar that is "crowding out manufacturing," he said.
Mr. Roubini said the value of the Canadian dollar is too high, given the need to keep the country's manufacturing sector intact. While the shift to commodity exports has been healthy for the overall economy, it has caused a lot of regional disruption, he noted. And if there a major correction in commodities in the coming years, it will be a "massive shock" to that sector while manufacturing exports will have declined in importance and not be able to take up the slack.
Consequently, "I would use, more aggressively, monetary policy to weaken the currency," Mr. Roubini said. "If your currency was 10 per cent weaker that would help manufacturing and it will not cause a significant amount of inflation, which is currently well below the target. The risk of doing that is relatively modest. ... Keeping your currency weaker right now is important."
In an interview after his speech, Mr. Roubini said there are a variety of measures the Bank of Canada could use to lower the value of the dollar. "They could talk down your currency by saying you wouldn't mind if it is weaker," he said. The case for cutting rates isn't strong, he noted, but the bank could signal that it is in no rush to raise rates until the U.S. Federal Reserve Board has done so.
"If the Fed starts to raise rates some time next year, and the Bank of Canada waits for a few months, if not quarters, then money is going to flow out of Canada into the U.S. and that is going to weaken the currency."
In his speech Mr. Roubini repeated his view, expressed last year, that Canada is among the countries where the housing market has "signs of frothiness, if not an outright bubble."
He said he is not predicting a bust in Canada – partly because of the strength of the Canadian banks and the absence of sub-prime "excesses" – but a "meaningful correction" could occur and that could dampen the economy.
"I would not expect a real crash. The worry is that even if it is a soft landing, if home prices fall, and consumers don't walk away from their debt, that is going to slow down consumption growth."
As for the world economy, Mr. Roubini noted that the rapid growth in most emerging markets has hit a sharp slowdown. Countries such as India, Brazil, South Africa, Indonesia and Turkey are the most vulnerable. Going forward, however, some countries that are tied to the improved growth of more advanced economies will do better, he said. Among those are South Korea, Malaysia, the Philippines, Hong Kong, Singapore, Poland and the Czech Republic.
In advanced markets, many of the risks of the past few years have diminished and there should be modest growth of about 2 per cent on average, he said.