The Weekly Wrap, January 12, 2024
The year of the pivot
By Mark Parsons, ATB Economics 12 January 2024 9 min read
We’re back with our first ATB Economics wrap of 2024! This week, we discuss our Alberta economic watch list for 2024. Also on deck is the US inflation report, and a closer look at the demographics of Alberta’s labour force.
Last week’s stagnant Canadian jobs report didn’t really change the storyline: the labour market is cooling alongside the broader economy, setting the stage for interest rate cuts this year.
As for Alberta, a decent jobs report finished the year, though rapid labour force entry is putting pressure on the unemployment rate. We see the economy slowing as higher rates bite with a lag, leading to more cautious consumers and businesses. But, as in 2023, we expect Alberta to outperform—that is, it will hit a speed bump in the faster lane.
Our economic watch list for 2024
“Pivot, pivot…pivot!” - Central bank looks to lower rates
It’s the question on everyone’s mind—when will interest rates decline? While Governor Tiff Mackelm has said “it’s too early” to consider cutting, the Bank of Canada has hinted we’re at peak rates and even expects inflation to get close to the 2% inflation target by year’s end.
Pivoting can be hard. Fans of the sitcom series, Friends, may remember the scene where Chandler, Ross, and Rachel are trying to haul with great difficulty a couch up the stairs (season 5, episode 16). Ross yells “pivot” on repeat, as they struggle to maneuver the couch around the corner.
The Bank of Canada’s rate pivot should be better planned. The data point to a cut this year: the economy is slowing (negative Q3 GDP, flatish Q4 expected), the labour market is softening (the unemployment rate in December was up 0.8 points from the low in April), and inflation has been trending lower (3.1% in November, down from a peak of 8.1% in June 2022).
Some inflation concerns persist. Shelter costs have replaced food as the new inflation driver. Much of this is mortgage costs (+29.8% y/y in November), which are directly related to the Bank’s policy rate. But rents have also accelerated (+7.4% y/y). Tiff Macklem indicates that “structural undersupply” forces are at play amid surging population growth. Wage growth (5.2% y/y in December) also remains firmer than what the Bank says is consistent with getting to target inflation.
While there is talk of a potential cut in April, we are in the more cautious camp. We see the Bank moving carefully, waiting for very clear evidence of sustained declines in core inflation and inflation expectations. Our forecast has the policy rate dropping in June and at 4% by end of year.
Oil prices - all eyes on OPEC, Middle East conflicts
Some will remember calls for $100/bbl oil around mid last year. It hasn’t happened, even with the Middle East war and recent Red Sea attacks. WTI oil prices are trading around $73/bbl this morning. One reason is surging U.S. crude oil production, up 1 million barrels per day (b/d) to a new high of 12.9 million b/d last year according to the U.S. Energy Information Administration (EIA). This blunted OPEC+ cuts designed to prop up prices. It isn’t just the US: Brazil ramped up production, Russian production was resilient despite sanctions, and Iran increased its exports. More recently, markets have questioned the resolve of OPEC+ to stick to its plan to lower production by 2.2 million b/d through the first quarter. In a forecast released this week, the EIA now projects WTI to average $US78/bbl this year, as OPEC + cuts lead to inventory draws in early 2024 and the market rebalances in the second half. Expect continued volatility, with the wild card being the ongoing war in the Middle East and its potential impact on supply.
Fundamental changes for energy export infrastructure
A strengthening oil and gas sector is one of the reasons Alberta’s economy is expected to outperform again in 2024. Prospects are supported by much-needed improvements in market access. A recent report by ATB Capital Markets notes “fundamental changes” are ahead given enhanced market access via the Trans Mountain Expansion (TMX) Project and Coastal GasLink pipeline. Energy remains the nation’s largest export category, and by a long shot. In 2023 (Jan through November), energy comprised 26% of Canadian merchandise exports (mainly crude oil, bitumen, natural gas, and refined products) generating almost $16 billion per month in export earnings. The second largest category is autos and parts at 12%. Further delays in the TMX project represent a downside risk to the Alberta and Canadian outlook.
Mortgage renewals will slow the consumer
Alberta consumers stormed out of the gates in early 2023, but curtailed their spending in the latter part of the year. The lagged effects of higher interest rates have set in, along with fatigue from high inflation. We estimate that debt interest costs as a share of disposable income will rise to nearly 9% this year and 2025, leaving less room for spending. For this reason, we don’t expect much from the consumer this year. Our forecast is for real consumption to rise only 1.2% (down 1.2% in per capita terms). The first half should see some weaker retail readings, before improving in the back half as rates decline.
Housing will play demographic catch up
It’s a stretch to say that homebuilding will catch up to the record inflows of migrants, but we do expect current momentum to continue. The last half of 2023 saw a marked improvement, mainly due to gains in multi-units in Calgary. Our forecast for 2024 is for 39,100 housing starts. The improvement will help, but many more homes will need to be built. Higher interest rates and labour shortages have slowed homebuilding, and will act as a constraint again this year.
Job growth to cool, but some hiring challenges will persist
After leading all provinces except PEI in job growth last year, we expect the pace to moderate this year. A November survey of Alberta businesses points to a slowdown in hiring and easing of labour shortages. But pockets of shortages persist. While job vacancies have eased since mid 2022, they remain above pre-pandemic levels, particularly in certain industries like food and accommodation, construction, and transportation and warehousing (see chart).
The labour force (those working or looking for work) is also growing at a rapid clip amid record in-migration. Unemployment readings may stay above 6% in the coming months before moving back down, as population growth moderates.
Will we see more major projects?
The biggest project announcement in Alberta last year was Dow’s Path2Zero project with a price tag of $11.5 billion (including partner investments, excluding government supports). Future Energy Park, a biofuels plant with a cost of $1.2 billion, is expected to begin construction this year after clearing regulatory approvals late last year. Momentum on major projects, such as hydrogen, biofuels, petchem and carbon capture, could lead to stronger investment than currently forecast (i.e. an upside risk).
Finding a home on the (forecast) range
There are multiple external events that could steer Alberta’s highly trade-exposed economy off its expected course. Concerns have also been raised about a possible drought if dry conditions continue, impacting Alberta’s agriculture producers. The federal oil and gas emissions cap adds a layer of policy uncertainty with draft regulations expected later this year. Given all the risks, we have been running and publishing scenarios since June 2023 to illustrate how Alberta may perform under different conditions. In the high scenario, real GDP growth could be 4.1% in 2024 according to our December Outlook. In the low scenario, real GDP contracts 0.2%. Our base case has a gain of 2.1%.
U.S. on the bumpy road to 2% inflation
The U.S. economy has been incredibly resilient, with markets optimistic that target inflation will be reached without much damage to the labour market. The Consumer Price Index rose 3.4% y/y last month, hotter than market expectations and up from 3.1% in November. Continued price stickiness came from shelter and service costs.
In December, Federal Reserve officials forecast 0.75 percentage points of cuts to the Fed funds rate in 2024 (median forecast). This week’s inflation report is unlikely to fundamentally change the Fed’s view.
Interesting Fact…According to our consumer spending index, daily ATB Mastercard purchases during Black Friday* were 38% higher than average daily spending in 2023.
*Includes the day prior to Black Friday and two days later to account for early and extended sales.
Chart of the Week: Why is the labour force participation rate higher in Alberta?
Last week, we looked at Alberta’s labour market performance in 2023. This week, we ask a simple question: why is the labour force participation rate (the part rate) higher in Alberta? (The part rate is the share of the population 15 years and older that is working or looking for work.)
Alberta’s high part rate is nothing new. It has been higher than any other province since 1976, the earliest data. In 2023, Alberta’s part rate was 69.6% compared to 65.6% nationally (Saskatchewan was second at 67.3%).
At the same time, the part rate has been trending lower since 2008, due to population aging, recent economic shifts (e.g. 2015-16 recession, 2019 market access problems, 2020 COVID recession), and a decline in youth participation rates. As a result, the gap with the national average has narrowed from 6.6 percentage points, on average, between 1976 and 2015 to 4 points in 2023.
How much of the current gap is related to demographic features—namely, Alberta’s higher share of young, working age people (see chart)? Turns out a lot. We find that most of Alberta’s higher part rate (relative to the national average) is due to having more young people in their prime working years.
To see why, see our Chart of the Week. For the younger to middle age cohorts, part rates in Alberta hold fairly close to the national average. In the older groups, part rates are higher in Alberta, though this only explains a small portion of the overall gap. A numerical exercise more clearly makes the point. If we apply Canada’s age shares to Alberta’s age-specific part rates (i.e. demographically adjusted part rate), we get a part rate just slightly higher than the national average (about 1 percentage point).
Alberta’s ‘young’ starting point is an advantage. But the labour market will still face aging pressures, even with steady in-migration of mostly younger people. According to the province’s latest medium population projections, the share of the working age (15+) population that is 65+ will rise from 18.3% in 2023, to 20.6% in 2030, and 23.4% by 2050.