“The domestic economy is in good shape, but it still needs to work through an inventory adjustment,” Basile says. He points to the manufacturing sector, particularly vehicle production and auto parts, as an area that still presents challenges to the Canadian growth picture.
“Demand and supply got out of balance,” he adds. “Supply ran too fast after the shock of the currency appreciation in 2004.”
Basile also believes the surplus of autos in the U.S. is a negative factor for Canada.
We had too many light trucks and bigger SUVs in the U.S. that weren’t selling,” he says. “[General Motors] notably had trouble selling bigger SUVs. There was an inventory problem in the U.S.; dealer lots were overstocked and they had to cut production in the U.S. and Canada.”
However, looking beyond the summer months, Basile believes the inventory adjustment will be resolved.
Pointing to his 3.7 percent GDP forecasts for the third and fourth quarters, which are above BOC forecasts, he explains, “I think we will get a bigger swing from inventories.”
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