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The Weekly Wrap, April 26, 2024

Hope springs eternal

By Mark Parsons, ATB Economics 26 April 2024 9 min read

In this week’s ATB Economics Weekly Wrap…

  • The hydrogen economy
  • Fly on the wall: Bank of Canada deliberations 
  • Retail retreat: Consumer fatigue sets in
  • Multi-gains: The surge in apartment starts
  • Population headwind: The coming pullback in temporary residents
  • Interesting Fact: Decarbonized cement
  • Charts of the Week: U.S. and Canada economic growth since the rate hikes

Spring is in the air. What’s your marker of spring? For some, it’s the vernal equinox (did March 19 feel like spring?). For me, it’s the street cleaners I passed this week, clearing the loose gravel that can wreak havoc for cyclists. Or maybe it’s the start of the NHL playoffs (go Oilers!).

For Oilers fans and borrowers, hope springs eternal. In the U.S., inflation is refusing to fade. The market is now placing the greatest odds of the first Fed rate cut in September. U.S. equities have declined on the sticky inflation readings. Canada is primed to move earlier, thanks to softer core inflation and a much weaker labour market. We’re still in the mid-year rate cut camp—June or July depending on how the upcoming data lands. May 21 is marked on our calendars—the final inflation report before the June 5 rate decision.

We also wait for spring showers. Conditions are dry throughout the province, with the province announcing four water-sharing agreements to help mitigate the risk of severe drought. More than 200 fires have already been reported this year. Recall last May, when wildfires led to evacuations and production shut-ins.

The hydrogen economy - just getting started

The Edmonton Convention Center was buzzing this week as the Canadian Hydrogen Convention kicked off. It’s not just hype. Alberta is the largest hydrogen producer in Canada, with huge upside to this low carbon energy source on the path to net zero.

The province has a number of advantages—abundant low cost feedstock of natural gas, carbon capture geology and capabilities, existing talent and expertise, and incentive programs.

Projects are underway. Air Products’ $1.6 billion Alberta Net Zero Hydrogen Complex is under construction. It will supply Imperial Oil’s $720 million biodiesel facility (also under construction). Hydrogen will also be used for power generation (see the Battle River Carbon Hub proposal) and in the transportation sector (Edmonton International Airport and Toyota are partnering to bring on 100 hydrogen fuel cell vehicles). Check out this video on decarbonization activities from Edmonton Global.

Announced this week, the Government of Alberta will invest $57 million to develop hydrogen power and Air Products plans to build a network of commercial hydrogen fueling stations along the QE II Highway between Calgary and Edmonton (the first station is slated for Edmonton next year).

Fly on the wall - Bank of Canada deliberations

We didn’t learn a ton from the recently released Bank of Canada deliberations from its April 10 meeting. The Governing Council had “mixed” views—some worried about upside risks, others noted progress. As an aside, this meeting took place before the release of data showing another decline in core inflation in March, something Governor Macklem has been clear he wants to see more of before cutting rates.

Our main takeaway: The Bank is far from declaring victory in the battle against inflation. The key word used in the deliberations is “gradual”—that’s the planned pace for easing monetary policy.

Consumers - In hibernation, looking for rate relief

The extended bout of inflation and higher interest rates has dampened the mood for spending.

Retail spending in Alberta shifted into reverse in the first two months of the year. Recent weakness is primarily coming from gasoline stations and vehicle sales. Core sales, which exclude these categories, are still rising year-over-year.

But no matter how you slice the numbers, the trend is clear—individual consumers are scaling back. Our more timely ATB Consumer Index (the value of Mastercard transactions) supports this trend, and indicates that March spending cooled again.

Who can blame consumers? Interest costs are eating up a rising share of disposable income and food costs (to name just one example) have jumped 21.5% since January 2021.

Consumer fatigue was baked into our March forecast. In real terms, household consumption spending is forecast to rise only 1.5%—or negative 1.8% per person. We see no reason to change that call. A material improvement in spending will likely need to wait for interest rates to reverse course.

Still an appetite for dining out

Not all spending has been equally impacted.

Consumers have cut back on shoes, autos, and sporting goods so far this year. But a rapidly growing population still needs to be fed, and grocery sales continue to rise, albeit at a slower rate.

People are still dining out and ordering in. Restaurant sales have outpaced grocery sales the last two years and are further above pre-pandemic levels.

Why? It could be as simple as folks enjoying the experience post COVID. The Bank of Canada’s latest consumer expectations survey doesn’t talk about restaurants, but it does speak to the pent-up demand for services after the pandemic: “consumers continue to expect to purchase services such as vacations or major events, especially those consumers who say they had been delaying these purchases for a while.”

We expect that spending on services will continue to outpace goods spending (especially on higher priced durables) this year.

Sales at restaurants and bars have recovered from their lows during the pandemic

Sales at restaurants and bars have recovered from their lows during the pandemic

Housing starts - they’re multi-plying

“I got chills, they’re multiplying,” John Travolta, Grease

Home construction in Alberta has rebounded handsomely since last summer. Zooming in, the recovery has been fueled by multi-units (apartments and row housing).

Construction of new homes has been on the rise in Alberta

Construction of new homes has been on the rise in Alberta

Apartment starts hit 4,925 between January and March—the highest first quarter level since the late 1970s and the fourth highest of any quarter on record. That’s clearing a high bar for Alberta, surpassing the construction boom of 2006-2008. The apartment building surge has been concentrated in Calgary, though Edmonton has picked up as of late.

This latest jump is impressive given the circumstances: unfriendly interest rates, labour shortages and higher construction costs.

It is also desperately needed. There were more than 70,000 households added last year to the province (our estimate). To state the obvious, people need places to live. The current run rate is >10,000 housing starts each quarter (or >40,000 annualized). Many more homes are still needed. The question is, can the industry keep this pace going? There were over 11,400 job vacancies in Alberta’s construction sector as of the fourth quarter of last year—labour remains a key limiting factor.

New supply will help, but in the meantime, rents and prices continue to rise. The resale benchmark home price in Alberta rose nearly 10% in March year-over-year, while rent (in the CPI basket) was up 14% over the same period.

Apartment construction has been particularly strong in Calgary

Apartment construction has been particularly strong in Calgary

Population headwind - A pullback in temporary residents

It’s no exaggeration to say Canada’s population growth numbers have been off the charts. Last calendar year, Canada’s population grew by 1.3 million (or 3.2%).

But newish developments will take some of the wind out of the demographic sails.

First, the federal government has announced a cap on international students to approximately 360,000 study permits—down 35% from 2023. The cap is allocated on a per capita basis to provinces, which will disproportionately affect B.C. and Ontario (the main destinations of international students). Alberta’s enrollment numbers are unlikely to be impacted overall in the near term, but may impede future growth.

Second, the federal government has announced targets for non-permanent residents* in general, with further details coming in the fall. The stated aim is to reduce NPRs to 5% of the national population over the next three years. Last year, NPRs represented 6.2% of the population, so hitting the 5% target will require a sizable drop. The federal government also announced changes to the Temporary Foreign Worker program effective May 1, reducing the percentage of the workforce who can be filled by the program in certain sectors.

As for Alberta, a slowdown in NPRs was already contemplated in our March outlook. While the recent target poses some downside to our population forecast, we see a smaller impact in Alberta for a couple reasons. As mentioned, Alberta has a low percentage of international students, and will be far less impacted by the cap. Further, NPRs as a share of Alberta’s population were already much lower (3.8% last year)—well below the national average of 6.2% and the national 5% target. We await more details on how the targets will be met.

*NPRs are newcomers to Canada who do not have permanent resident status, including temporary foreign workers, asylum claimants and international students.

Interesting Fact:  In Alberta, companies are working to reduce emissions in the cement industry. Here are a couple examples. Calgary-based Carbon Upcycling announced its first delivery of CO2-enhanced fly ash to BURNCO Rock Products. Heidelberg Materials is developing “the world's first first full-scale carbon capture project” at its cement plant in Edmonton.

Cement is key to a modern economy, used primarily in the production of concrete for buildings. To produce, raw materials (e.g. limestone and clay) are pulverized and mixed, heated at high temperatures, ground into fine fine powder, then mixed with water and aggregates. Given this process, cement is naturally a harder-to-abate, more-emissions-intensive sector.

Charts of the Week: U.S. and Canada economic growth since the rate hikes

The U.S. economy’s resilience to higher interest rates has surprised many. To give one example, the International Monetary Fund forecast in January 2023 that the U.S. economy would grow by 1.4% last year. The actual growth came in at 2.5%.

But the economy may finally be succumbing to rate pressure. Real GDP growth slowed in the first quarter to 1.6% annualized, below expectations and a marked decline from the 3.4% pace in the final quarter of last year. Consumers, who have been a growth anchor, slowed their purchases to 2.5% annualized (spending on durables, which is more rate sensitive, fell).

Yet, annoyingly for the U.S. Federal Reserve, price pressures remain elevated. The GDP price deflator, a broad gauge, accelerated in the first quarter. As did the core Personal Consumption Expenditure (PCE) price index. The Fed will need to see progress before cutting its policy rate.

The divergence between the Canada and the U.S. economies since interest rates started rising in early 2022 is stark. As shown in our Charts of the Week, Canada’s economy slowed to a crawl, and has been declining in per capita terms. On the other hand, the U.S. has only recently shown signs of weakness. We discussed some of the reasons why in last week’s Wrap.

Economic growth in the U.S. has been surprisingly strong in the face of higher interest rates

Economic growth in the U.S. has been surprisingly strong in the face of higher interest rates

Canada's economy has been feeling the weight of higher interest rates

Canada's economy has been feeling the weight of higher interest rates

Answer to the previous trivia question: The North American Free Trade Agreement (NAFTA) came into force on January 1, 1994, superseding the 1988 Canada–United States Free Trade Agreement.

Today’s trivia question: Approximately how many times larger is the population of Mexico compared to the population of Canada?

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