Weekly Wrap October 13, 2023
A quiet data week before next week’s data storm
By Mark Parsons, ATB Economics 13 October 2023 8 min read
In this week’s ATB Economics Weekly Wrap…
- Volatility in global oil markets
- Is Alberta home construction turning the corner?
- U.S. inflation stays stubborn
- Next week: Canadian inflation on Tuesday
- Research on women's labour market outcomes earns Nobel
- Chart of the week: Landed immigrants in Alberta’s labour force
This was a quieter week for data releases. Next week, there will be more to chew on: inflation, retail, and manufacturing.
Middle East war adds to oil market uncertainty
Over the weekend, Hamas launched a surprise attack on Israel. The war has already had a tremendous human toll, and our thoughts are with the victims. The oil market was volatile this week as it attempted to price in the potential impacts.
Oil prices rose in the immediate aftermath of the attack, by nearly $US4/bbl (West Texas Intermediate, WTI). The conflict zone is near major crude producers like Iran and Saudi Arabia. Traders are watching closely whether the conflict spreads more broadly, which could impede oil flows through sanctions or disruption of trade channels (e.g. the Strait of Hormuz). WTI has pared back some of the earlier gains on other news, such as stronger U.S. crude inventories, signs of demand erosion, and a potential easing of U.S. sanctions against Venezuela. As of the end of the day on Thursday, WTI was at $82.91/bbl, roughly where it was last Friday. However, it has moved higher again today in early morning trading. We are likely to see more price volatility than usual as markets react to news coming out of the Middle East.
WTI has been on a rollercoaster as of late, rising to over $93/bbl in late September as Saudi Arabia and Russia extended their production cuts. Concerns over demand destruction from ‘higher for longer’ interest rates led to a reversal of these September gains.
Global economy - shifting down a gear
The IMF forecasts a soft landing, with most of Alberta’s trading partners set to slow next year.
A few takeaways from the International Monetary Fund’s updated global outlook:
Betting on a soft landing - The IMF believes the global economy can beat inflation without a serious downturn. The U.S. economy in particular will be resilient.
Two lanes: moderate and slow - Global growth will be slow by historic standards. But there are two lanes. In the moderate lane, emerging market and developing economies will grow at the same pace next year at around 4%. In the slow lane, the advanced world will decelerate from 2.6% to 1.5% next year.
Not out of the woods - Risks are high, and despite some early-year resiliency, the IMF warns “it’s too soon to take comfort.”
Risk off, risk on - Sometimes it feels like risks are only increasing. But the IMF reminds us that the debt ceiling and regional banking crisis in the U.S. earlier in the year came and largely went (though a potential U.S. government shutdown still looms). There are other problems to worry about, like the Chinese property market. And some of the usual risks are still there: geopolitical instability, sticky inflation, weather-related events, to name a few. Notably absent in the outlook, because of timing, is the new war in the Middle East. In the press conference, however, the IMF’s Chief Economist, Olivier Gourinchas, noted that a 10% increase in oil prices, if sustained, could slow global output by about 0.15%.
Much the same - In some ways, this was a status quo report. The outlook for real GDP hardly budged from July—down only 0.1 points next year.
Alberta’s largest trading partners: slowing, but staying afloat - We’ve constructed a trade-weighted IMF growth rate based on Alberta export shares. At 88% of exports, the U.S. dominates our index. It shows a moderation in growth of about 0.6 points next year.
Building momentum - early signs of rebound
Although not as high as last year, residential construction intentions have shown some early signs of improvement in Alberta.
Residential building permits are too volatile to read into month-to-month changes. But the recent trend is promising, though still tentative. After a pullback in the first half of the year, residential building permits (3-month moving average) and housing starts have both moved higher over the summer months. We will be watching closely if this sticks in the face of ‘higher for longer’ interest rates. Our thesis has been that the demographic demand forces will counter the headwinds, and that housing starts will pick up next year to 38,500 (near July and August 2023 levels, annualized).
On the non-residential side, activity has been more stable. Non-residential permits are up 7.6% so far this year, propelled by gains in industrial activity.
In September data released this morning, the resale housing market remains strong in Alberta. Since the last two rate hikes by the Bank of Canada, unit sales have continued to march higher, bucking national declines. More on this next week.
Sticky U.S. inflation and higher for longer rates
The journey back to 2% inflation is long and winding. The Federal Reserve is likely to keep rates high for an extended period amid a resilient U.S. economy.
South of the border, ‘underlying’ U.S. inflation is easing, but in a very slow and sticky way. The closely watched ‘core’ inflation measure, which strips out volatile food and energy costs, rose 4.1% year over year in September—the smallest gain in two years. That’s still a high number, and the monthly increase of 0.3% is not consistent with the 2% target. Headline inflation stayed at 3.7% last month, which was higher than expected.
Will this push the Fed off the sidelines November 1? On its own, probably not. It follows recent ‘dovish’ speeches by Federal Reserve officials that past rate hikes might be enough to grind inflation lower without a major economic downturn. So far the market is largely pricing in no rate increase on November 1 with higher odds (though still well below 50%) of a hike in December, according to the CME FedWatch tool.
Next Week - Canadian inflation
This is the last big release ahead of the Bank of Canada’s October rate decision. The Bank will be looking for progress on ‘core’ readings.
Canada is fighting its own inflation battle, and we’ll find out next week if the Consumer Price Index is showing any signs of easing ahead of the October 25 rate decision. August inflation was 4% (higher than consensus) and core readings went in the wrong direction (higher, that is). As such, September’s CPI will be an important one to watch. Recall that gasoline prices drove annual inflation higher in August. Gasoline prices fell slightly month-over-month in September, but they were still higher than a year ago.*
The Bank of Canada will have to balance the weaker economic backdrop, which should ease inflation caused by ‘excess demand’, with still too-hot-for-comfort inflation readings. The summary of deliberations from the last rate announcement reinforces the Bank’s ‘data dependent’ stance, and its willingness to hike if inflation doesn’t cooperate: “tighter policy should remain a potential option until they see convincing evidence that slowing demand is translating into reduced core inflationary pressures.”
Unlike the United States, Canada's economy has cooled considerably, creating a different dynamic for monetary policymakers. Second quarter GDP contracted slightly, and the monthly GDP reading was flat in July. Last week’s labour report was mixed—wage growth stayed strong and employment gains exceeded expectations. But the details showed the gains concentrated in part-time work and in the education sector. Further, while the unemployment rate held steady, it will be difficult for the economy to keep churning out jobs fast enough to keep up with the rapidly growing labour force.
*The Weekly Pump Survey by MJ Ervin shows average gasoline prices rose 7.9% (year-over-year, y/y) in September, up from 1.2% y/y in August (this is less of a swing than the -12.5% to +1.2% y/y movement between July and August). This survey tracks the CPI gasoline index very closely.
Interesting fact…The winner of this year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel—Harvard professor Claudia Goldin—is the third woman in history to win a Nobel in this category. Dr. Goldin was awarded the prize for “advanc[ing] our understanding of women’s labour market outcomes.” According to the statement, Dr. Goldin “provided the first comprehensive account of women’s earnings and labour market participation through the centuries.” Dr. Elinor Ostrom was the first woman to win the prize, receiving it 2009 for her work on economic governance. Dr. Esther Duflo received the award in 2019 for her work on global poverty.
Immigration at work
Immigration has helped address labour force needs, especially as the population continues to age.
Our Chart of the Week shows participation in the labour market by immigration status. Last week it was our “interesting fact”—so interesting that we turned it into a chart!
The Labour Force Survey tracks employment by immigrant status—that is, landed immigrants, and those born in Canada. The share of landed immigrants* in the Alberta labour force reached a record high last month at 29%, or 776,400 (3-month moving average). Over the last 10 years (2013 to 2022), landed immigrants in the Alberta labour force rose 56% compared to essentially no change (+0.3%) among those Canadian born. A similar trend holds across the country, though Alberta’s share has recently eclipsed Canada’s.
*Refers to people who are, or have been, landed immigrants in Canada. A landed immigrant is a person who has been granted the right to live in Canada permanently by immigration authorities. Canadian citizens by birth and non-permanent residents (persons from another country who live in Canada and have a work or study permit, or are claiming refugee status, as well as family members living here with them) are not landed immigrants.
Calgary Economic Development (CED) will host its 2024 Economic Outlook event on November 1. I have the pleasure of speaking at the event. To set the stage and for a glimpse of what to expect, I sat down with CED. You can find out more here.
Answer to the previous trivia question: Being afraid of Friday the 13th is known as either paraskevidekatriaphobia or friggatriskaidekaphobia depending on which combination of Greek and Old Norse root words you prefer.
Today’s trivia question: The 2023-24 National Hockey League regular season is underway. How many seasons (including the current one and the 2004-05 season that was not played due the lockout) have there been?