Weekly Wrap October 20, 2023
Weathering the storm
By Mark Parsons, ATB Economics 20 October 2023 5 min read
In this week’s ATB Economics Weekly Wrap…
- Cautious consumers despite higher August sales
- Inflation: Some breathing room ahead of next week’s rate announcement
- Manufacturing shipments bounce back
- More places to live - housing starts take flight in Q3
- A tighter resale market
- Chart of the week: Alberta home sales shrug off latest rate increase
Lots to digest this week with more signs that Alberta’s economy is weathering the inflation and interest rate storm relatively well when it comes to housing and consumer spending.
Alberta retail sales improved in August, but signs of caution
The resiliency of the Alberta consumer is being tested by higher interest rates. Retail sales bounced back in August after two straight monthly declines, but the trendline has flattened.
Alberta consumers increased their spending in August, one of only four provinces to do so. The 0.9% gain comes after two monthly declines. Statistics Canada reports that the port strikes in B.C. impacted sales for about 12% of Canadian retailers. Year-to-date sales are up 5.4%—the second largest increase after PEI and outpacing the national gain of 2.1%.
Despite the monthly increase, consumers are showing more signs of caution at the tills. Monthly sales remain below January’s elevated levels, and year-over-year growth shows a moderating trend. Our Consumer Spending Index, based on the value of ATB consumer Mastercard transactions, is more volatile than the retail numbers, but tracks well over time. It suggests a pullback in September. A slowdown in consumer spending was baked into our September forecast, and is the main factor contributing to a moderation in real GDP growth in Alberta next year.
Nationally, there were more signs of consumers tightening their belts. Retail sales declined in August (-0.1%) while the advance estimate suggests sales were unchanged in September. The Bank of Canada had previously noted the resiliency of the Canadian consumer. However, second quarter growth in real household spending was essentially flat (0.2% annualized), and the summer retail readings point to further weakness. It's likely that the Bank will downgrade its 2023 forecast in next week’s Monetary Policy Report.
Stage set for hawkish pause
The Bank of Canada received some encouraging, if tentative, inflation news this week. We expect the Bank to keep its finger on the pause button on October 25 while signaling its willingness to raise interest rates again if inflation doesn’t continue to cooperate.
On 6:31 MST Tuesday morning, a collective sigh of relief could be faintly heard as analysts reviewed the latest Consumer Price Index readings from Statistics Canada. As reported in Tuesday’s Owl, the annual national inflation rate fell more than expected, nudging down from 4.0% to 3.8%. The downtick was broad-based with y/y price growth lower or flat in six of the eight major spending categories with the various measures of core inflation all lower in September.
But hold the champagne! To state the obvious, an annual inflation rate of 3.8% and core inflation running (depending on the measure) at 3.7-4.4% is still well above the Bank of Canada’s 2% target. The other piece of unwelcome news came via the Bank’s Consumer Expectations Survey released on Monday, which showed that consumers have not really changed their expectations of high inflation over the next 12 months despite declines in the headline reading. Finally, the Bank of Canada will no doubt highlight stubborn wage increases of around 4-5%, which it has repeatedly said are inconsistent with the 2% inflation target.
Given this week’s CPI report and the softening economic backdrop, we expect a hawkish pause, similar to what the U.S. Federal Reserve delivered last month. In other words, the Bank will remind everyone that the inflation battle is not over and is prepared to raise rates even higher if necessary.
Alberta inflation: Back below the national rate
In Alberta, headline inflation nudged slightly below the national rate in September, where it’s been for all but one month this year (August). At 3.7% y/y, the provincial inflation rate was driven by food, energy, rent, health and personal care. Food prices remain elevated, but are adding less to inflation (5.5% y/y was the lowest increase since December 2021). At the same time, the cost of rent has been picking up, hitting 8.5% y/y growth.
Factory sales stronger
Alberta’s factory revenues were buoyed by a rally in commodity prices in August, but they remained below last year’s heightened levels.
For the second consecutive month, manufacturing sales in Alberta increased, rising 6.0% to $8.7 billion in August. Despite the favourable monthly performance, Alberta’s factory sales remained 4.6% lower so far in 2023 relative to the same eight months of 2022, weighed down by lower prices.
Much needed boost in home construction
Residential construction has struggled to keep pace with record migration this year amid rising interest rates, higher costs and labour shortages. In last week’s Wrap, we pointed to tentative signs of a turnaround in the summer. New September data reinforces this trend: housing starts hit an 8-year high of 49,000 (annualized, seasonally adjusted) in September, driven by multi-units. While this pace is unlikely to sustain, the third quarter rebound supports our forecast for stronger activity heading into next year.
A tighter resale market
As with home construction, the resale market has picked up steam. Housing prices tend to rise when inventories are low (as measured by months of supply), and that’s been the case in recent months (see the chart below). Alberta home prices, as measured by the MLS® composite benchmark, are up 5.8% over the last 12 months. Calgary has been the main driver (+8.2% y/y) with Edmonton lagging (-1.2% y/y).
The Bank of Canada influences interest rates by adjusting (or not adjusting) the “target for the overnight rate” (a.k.a. the policy interest rate) on eight fixed dates during the year. There are two rate announcements left in 2023 on October 25 and December 6. The Bank‘s Governing Council publishes a more detailed update four times a year called the Monetary Policy Report or MPR with the fourth and final edition of 2023 coming out next week. The MPR is important because it presents the Bank’s base-case projection for inflation and growth in the Canadian economy as well as its assessment of the risks in play.
Chart of the Week: Alberta housing sales shrug off latest interest rate increase
Canada’s resale market has been ebbing and flowing with interest rates. When the Bank of Canada started tightening in early 2022, home sales fell. When the Bank paused, sales rose again. But when rate hikes resumed in June, Alberta sales kept marching ahead while the rest of Canada shifted into reverse. Why the divergence? Candidates include faster population growth, with record interprovincial migration creating additional demand in the province, and relative affordability compared to more expensive markets.
Answer to the previous trivia question: According to the Canadian Real Estate Association’s MLS® Home Price Index, the seasonally-adjusted benchmark price of a townhouse in Alberta in September was $376,000 compared to $864,400 in British Columbia.
Today’s trivia question: How many non-permanent residents were there in Alberta on July 1, 2023?