In this week’s The Seven…

• Consumers shrug off tariffs…for now
• BofC - Why not cut?
• Travel shock
• Sputtering U.S. engine
• In the trade war crosshairs - Lumber and canola
• Under pressure - Oil prices
• Canada’s economy resilient to tariffs (so far)
• Waiting to get fast-tracked
• Still booming - Alberta home construction
• Summer pulse check
• Interesting Fact: Germany’s apprenticeship model
• Chart of the Week: U.S. effective tariff rates

“I'm gonna soak up the sun/I'm gonna tell everyone to lighten up”

—Sheryl Crow, “Soak up the Sun”

Taking a breather from the economic news this summer? Not a bad idea, mental health-wise.

Then again, staying informed is important, and the economy keeps doing its thing with or without us at work. For those playing catch up, I’ve devoted this Seven to what I’m tracking closely.

This week was slower on the data front, with an ‘as expected’ Canadian CPI report that won’t on its own change the Bank of Canada’s rate calculus and a Friday retail sales report.

Just after we posted, there were reports that Canada will be removing many of its retaliatory tariffs on U.S. goods with the Prime Minister holding a news conference at noon ET. This creates some upside to the economic outlook. More next week.

Consumers shrug off tariffs…for now

Fresh off the press this AM, retail sales in Canada point to a resilient consumer. Sales in June rose 1.5% in Canada and 1% in Alberta. So far this year, sales are up a solid 5.3% in Canada and 5.9% in Alberta (even real, or inflation-adjusted, sales have been strong).

This may be surprising given trade headwinds and sagging consumer confidence. 27% of retail businesses in Canada say they are being impacted by the trade tensions through price increases and supply disruptions.

Call us pessimists, but we think momentum is bound to slow in the second half. First, much of the gains have been in auto sales, which likely reflects front-loading effects. Prices are expected to increase further as pre-tariff inventory is worked off. Second, the labour market is soft, with unemployment rates increasing across Canada.

Why not cut?

We’ve had four months in a row with sub 2% inflation, including 1.7% in July. Sounds like it’s time for the Bank to resume its rate cuts.

Not so fast. The problem is that ‘core’ or underlying inflation, which strips out volatile items, is stubbornly high at 3%. The BofC wants that to come down.

The September meeting is a toss up (depending on the upcoming data), but we still think two more cuts are coming by year’s end. Then that’s it. After lowering its rate from 5% to 2.75%, the Bank is almost done cutting.

I might be an outlier, but here’s why I’m less worried about inflation than perhaps others.

Tariff impacts muted to date. It could be companies selling off pre-tariff inventory, or absorbing the costs via lower margins. Or it could be that a small percentage of our imports are subject to counter-tariffs (and most of our exports are CUSMA exempt). Durable goods (particularly vehicles) are prime candidates for tariff-induced inflation, and they did rise 2.9% y/y in July. But beyond that, it’s hard to see meaningful impacts in the data.

Shelter cost inflation will wane. This is a big one. Shelter costs are rising a still-hefty 3% year-over-year, but there are two big reasons why we should see that rate fall. 1) mortgage interest costs will continue to add less; 2) average rental accommodation costs are bound to slow or even fall as asking rents (a leading indicator) are outright declining in many cities. To illustrate, see the CPI rental index vs. asking rents in Calgary in the chart below.

A sluggish labour market means less pressure on wages, and in turn, prices. And the Canadian labour market is indeed soft at the moment.

Travel shock - Air Canada resumes flights

The worst case was averted. Flight attendants walked off the job at Air Canada on August 16 before returning to work August 19 with the flights of about 500,000 passengers disrupted as a result.

This was one of the largest airline labour disruptions since September 1998, when the Air Canada’s Pilot Association walked off the job for 13 days. Output in the airline industry contracted 15% that month - the largest monthly decline outside 9-11 and COVID (see the chart below).

The overall economic impact should be contained given the short duration - cold comfort to the stranded passengers who missed their flight.

U.S. Economy: A slowdown, not a crash

The U.S. economy has been running like a race car since the pandemic, but there are signs that its engine is sputtering. The economy added far fewer jobs in July than expected (only 73,000), and jobs were revised down sharply in the previous two months by a combined 258,000.

The Federal Reserve has been tapping the brakes to cool inflation without crashing the economy. But consumer price inflation remains a stubborn passenger at 2.7% in July, and even higher on the wholesale side.

(A useful analogy, or a desperate attempt to tie in this summer’s blockbuster - Formula 1?  You decide.)

Tariffs add to inflation and are making it harder to cut, putting Fed Chair Powell at odds with President Trump. You could cut the political tension with a knife as Chair Powell and other U.S. central bankers descend on Jackson Hole this week. While there is pressure to cut as the economy slows, the big risk is that inflation gets unhinged from the 2% target.

On balance, the latest job weaknesses could precipitate a cut - at least that’s what the market is pricing in for September.

On a related note, President Trump fired the head of the U.S. Bureau of Labor Statistics (BLS), Dr. Erika McEntarfer on August 1 after the Bureau released the disappointing July jobs report. The real risk? Politicizing government data could erode public trust and make it more difficult to know what's really happening in the economy.

Lumber trade tensions escalate

The long-running saga of U.S. duties on Canadian softwood lumber has hit another chapter. The U.S. Department of Commerce announced on August 8 new higher duties on Canadian softwood lumber, with some combined rates expected to rise to around 35%.

This isn't just a problem for Canadian lumber companies (Alberta is the third largest producer after B.C. and Ontario, accounting for 19% of softwood production last year). It also raises the cost of building homes in the U.S., frustrating builders who rely on Canadian imports to meet demand (especially as California rebuilds following the wildfires).

Canola crush: China imposes punishing tariffs

It’s not just the U.S. levying tariffs. A 76% tariff from China on Canadian canola seed and a 100% tariff on canola oil and cake has effectively shut down a $5 billion Canadian export market to China (including $1.6 billion from Alberta). The impact is devastating for Canadian farmers, who are facing immediate price drops and significant losses just before harvest.

Oil prices under pressure

Oil prices have receded from the mid-70s in mid-June to low-60s this month. This week, the U.S. Energy Information Administration raised some eyebrows with a bearish US$48/bbl WTI forecast for 2026.

The biggest concern is the return of OPEC+ supply to the market, leading to an expected inventory build. Demand forecasts have weakened amid trade turmoil.

The oil price dip is obviously something to watch for Alberta, with 68% of the province’s exports comprising crude oil and bitumen last year.

But also keep in mind that Alberta is less sensitive to price swings than in the past, in large part because producers have reduced costs since 2015.  More investment is now on the ‘sustaining’ side of the equation, which can more easily happen at lower prices.

The main hit is on the revenue side of the ledger, both for the producer and government. That said, if oil prices sink to very depressed levels, there is room to trim spending. Our forecast has oil and gas investment dipping 4% this year, but production still up 2.5%. That’s consistent with a recent update by DOB Energy, pointing to reduced guidance on capital spending, albeit with higher production guidance.

Our current WTI forecast is US$62/bbl in 2026.

Why has Canada’s economy been resilient to tariffs (so far)?

When the U.S. Administration launched the trade war in the spring, fears were that Canada's economy could be sent into a tailspin.

Why hasn’t that happened?

The main thing is that the tariff rate on Canada is lower than first imagined thanks to exemptions, save for some more punishing sector-specific tariffs (steel, aluminum, copper, cars and lumber). See the Chart of the Week below.

Moreover, the full brunt of the ‘Liberation Day’ tariffs has not been felt, with bilateral deals negotiated with the UK, Japan, and the EU (among others).

But let’s not get complacent. Projections are still tracking well below pre-tariff levels (Our Canadian growth forecast for this year has fallen from 1.8% in January to 1% in June), and the economy is forecast to be on a permanently lower track than before the trade war.

So, better than feared, but still not great.

Waiting to get fast-tracked

With ongoing trade threats, attention has turned to getting things done on Canadian soil.

Canadian businesses are awaiting a finalized list of major projects to be fast-tracked under the new federal Bill C-5: The Building Canada Act. The law aims to shorten approval times for projects deemed in the national interest.

While legislation is in place, the federal cabinet has yet to release the official list, creating uncertainty. Relevant to Alberta, we’ll be watching for any signs that projects that could create upside to our current outlook, such as carbon capture and storage (CCS), deepwater ports, and pipelines.

Housing boom - Edmonton catches Calgary’s home construction fever

This summer has brought plenty of rain and some pretty grim economic data. One exception, however, is home construction.

Alberta is on pace for a record year for housing starts. Those in Alberta during the 2006 home-building frenzy may be surprised that Alberta is on track for even more starts this year. 

We’ve upped our forecast to 55,000 housing starts for 2025 vs. 49,000 in 2026 (the previous record two decades prior).

There are a couple big differences between then and now. First, the concentration of starts are in mult-family homes, notably rentals. Second, this is primarily a major city story - Calgary and Edmonton account for 89% of the starts this year (in 2006, it was 65%).

A newer development is that Edmonton is starting to catch up to Calgary. Edmonton starts in June and July were record highs, and even exceeded Calgary.

The uptick in housing supply is good news, as builders play catch up to the ongoing population boom. According to our analysis of CMHC projections, Edmonton housing starts, if sustained at the current pace, should keep housing affordable, while Calgary needs to build even more housing to close the gap (though not near as much as more expensive markets in B.C. and Ontario).

Not convinced there’s a home construction boom in Calgary and Edmonton?  See the following chart. On a trend basis (6-month moving average), starts in Calgary and Edmonton have recently exceeded Toronto and Vancouver combined. That hasn’t happened since, well, ever (annual data back to 1961).