Weekly wrap September 22, 2023
A new outlook, and a slew of new economic data
By Mark Parsons, ATB Economics 22 September 2023 7 min read
In this week’s ATB Economics Weekly Wrap…
- Weathering the storm - our new Alberta outlook
- Rate alert - a busy week for central banks
- Sticky summer inflation
- More caution at the tills
- Building homes - Alberta starts bounce back
- A tighter resale housing market
- Chart of the week: deconstructing this year’s inflation
Lots to unpack this week with a steady stream of data and several interest rate announcements.
Alberta’s economic outlook - slowing growth, but still ahead of the crowd
Our top story, of course, was that ATB’s September Alberta Economic Outlook was released on Tuesday. For those short on time, here are the Coles Notes: Alberta has weathered the inflation storm better than most, with rapid population growth, rising energy investment, and resilient consumers. As a result, we’ve upgraded this year’s real GDP growth to 2.7%, but expect the economy to slow to 2.0% next year (down from 2.2% in our June forecast) due to the lagged impacts of ‘higher for longer’ interest rates. The economy is forecast to pick up again in 2025. Given the elevated risk out there (soft, softish, hard landing?), we’ve included high and low scenarios to accompany our base case (see chart).
Rate alert - a busy week for central banks
The central banks in some of our largest trading partners made key rate decisions this past week.
South of the border, the U.S. Federal Reserve held the line on its policy rate. But it was a ‘hawkish’ pause, with the Fed signaling that it is near the end of its hiking cycle, but may raise rates again before the end of the year. In Europe, the European Central Bank nudged its policy rate up 0.25 points to 4%. It hinted it may be at the end, or near the end, of its tightening cycle. The Bank of England held at 5.25% amid a cooler inflation report and signs of a slowdown. The Bank of Japan retained its negative interest rate and did not signal a shift in its loose monetary policy.
Summertime and the inflation is sticky
Hotter-than-expected inflation will cause some discomfort at the Bank of Canada. But there will be more data to digest before its October 25 decision.
Canada’s annual inflation rate went in the wrong direction last month, rising from 3.3% to 4.0%. The increase was not surprising—gasoline prices were widely expected to push up the headline rate. But the size of the increase was somewhat larger than the 3.8% consensus. And two ‘core’ readings that strip out volatile items (and tracked closely by the Bank of Canada) rose to around 4%.
Closer to home, inflation came in at 4.3% in Alberta—its first reading above the national rate since June 2022. The uptick reflects higher energy costs (electricity, gasoline and natural gas) and rent. Year-to-date inflation in Alberta is still below the national average (see our Chart of the Week below for a detailed look at what’s up and what’s down), and ex-energy inflation remained lower than the Canadian rate last month.
This is not a great report for the Bank of Canada, as it looks to steer the economy back to the 2% target. The ‘data dependent’ Bank will have more information to process before its October 25 rate decision, including fresh jobs, GDP, and inflation numbers. While risks of another hike have now increased, our view is that the Bank will keep its finger on the pause button next month due to the now apparent cooling effects of past rate hikes. Our latest forecast assumes ‘higher for longer’ rates, with the bank holding at current levels until mid-2024 before cautiously easing.
Consumers looking a bit more cautious
The resiliency of the consumer is being tested by higher interest rates. While Alberta continues to lead in year-to-date growth, retail sales dipped for the second straight month in July.
Alberta consumers are showing more signs of caution at the tills, as higher interest rates and inflation weigh. July sales dipped 0.4% following a downward revised 1.4% decline in June. The recent pullback is in large part related to vehicle sales, which are highly volatile and have come down in the last two months following a spike in May. Statistics Canada reports that the port strikes in B.C. impacted business activities in July, with the largest impact at auto dealerships.
Despite the monthly drop, Alberta continued to lead all provinces in retail sales growth so far this year. Year-to-date, sales are up 5.8% in Alberta compared to 2.1% nationally. While sales at auto and part dealers have geared down lately, they are still up 9.3% year-to-date.
Early this week, we forecast retail sales of growth of 4.6% in 2023, which assumed relatively flat readings for the rest of the year. We believe that there is still pent-up demand for autos, and as we’ve reported, auto sales are still well below the 10-year average. This, combined with rapid population growth and recent job gains, is expected to help offset the drag from higher interest rates.
For Canada, consumer spending is cooling. An ‘advance’ reading shows that retail receipts dipped 0.3% in August following a 0.3% gain in July—below the consensus estimate of 0.4%. For the Bank of Canada, this provides another sign that higher rates are having a cooling impact.
Summer upswing - home construction shows renewed signs of life
After a sluggish first half, homebuilding picked up in the summer even as national activity declined. While this is an encouraging sign, builders are still playing catch up following several quarters of record migration and we expect housing starts to improve to 38,500 in 2024.
More ground broke on new homes in Alberta over the summer, a turnaround from the sluggish pace set earlier in the year. Housing starts* came in at 39,555 annualized last month, following another solid 38,435 reading in July—well above the first half pace of 29,225. Even with the latest uptick, starts are down 12.6% year-to-date. Activity this year has been weighed down by rising interest rates, construction costs, and labour shortages.
At the regional level, Edmonton starts have jumped in the last two months after a very slow beginning to the year. Calgary has held its ground this year, with its big jump coming in May. Outside the two large cities, starts have remained well below last year’s levels.
Alberta bucked the national cooling trend over the summer. Housing starts in Canada have fallen for two straight months. Separate data on construction investment shows that Alberta was only one of two provinces to post an increase in July (though investment still remains well below year-ago levels).
*A housing start is defined as the beginning of construction work on the building where the dwelling unit will be located. This can be described in two ways: 1) the stage when the concrete has been poured for the whole of the footing around the structure; or 2) an equivalent stage where a basement will not be part of the structure.
A tighter resale housing market in Alberta
Alberta’s resale housing market has tightened in recent months amid rapid in-migration and strong job gains. The latest (seasonally adjusted) August data for Alberta show that:
- The months supply of homes fell for the sixth straight month to only 2.5 months (3.4 nationally). In contrast, national months supply has edged higher the last two months.
- The MLS benchmark price rose to $482,000 in Alberta, a new high and up 4.2% year over year. The national benchmark price was $757,600, roughly unchanged from the same time last year.
- Sales have risen in every month since February. In contrast, sales have fallen in the last two months nationally.
- While the sales-to-new listings ratio has nudged down slightly from its May peak of 76.5, it remains elevated at 72.5—well above the national rate of 56.
Interesting fact…The 24th World Petroleum Congress—the world's premier oil, gas and energy forum—wrapped up in Calgary this week. The organizing committee reports that there were over 10,000 unique visitors to the exhibition, over 5,000 delegates in attendance at the Congress, and registrants from 111 countries. The theme of this year’s conference was “Energy Transition: The Path to Net Zero.” The next Congress will take place in Saudi Arabia in 2026.
Our Chart/Table of the Week unpacks Alberta’s inflation rate so far in 2023 into its various components. Year-to-date, inflation in Alberta is 3.5% compared to 4.2% nationally.
Inflation measures can be hard to relate to for at least a couple reasons. First, the overall consumer price index is an aggregate of many items surveyed every month (Statistics Canada tracks over 600!). Second, the items in the basket are weighted according to ‘typical’ consumer spending patterns, and will not necessarily reflect the goods and services you actually buy (i.e. your ‘personal’ inflation rate).
The table attempts to address the first problem, by showing specifically what items went up and down (in ascending order for each bucket) this year in Alberta’s consumer price index, and by how much (in ranges).
Answer to the previous trivia question: Upon completion of medical school, it takes an additional six years of Royal College-approved training to become certified as a neurosurgeon in Canada.
Today’s trivia question: What is the full moon that occurs nearest to the autumnal equinox called?