indicatorThe Twenty-Four

The Seven, June 28, 2024

The long and winding road…to lower inflation and interest rate cuts | By Rob Roach, ATB Economics

28 June 2024 7 min read

In this week’s The Seven…

  • Up and down: May’s inflation reading
  • Hear ye, hear ye: Major project announcements
  • Not strong enough: GDP in April
  • People power: Alberta’s projected population growth
  • Interesting Fact: When I’m [65 and over]
  • Chart of the Week: Projected oil and gas capital spending

As we head into July and August, the data show that the Canadian economy has been growing, but at a slow pace. It seems odd to see it this way especially as households and businesses struggle to keep their heads above water, but this is actually good news as it means that the Bank of Canada should be able to make more interest rate cuts this year and, in turn, help the economy grow without risking the progress made in the battle against inflation. That latter part is key: too much growth too soon and we could lose a good chunk of the ground we’ve gained in terms of getting inflation under control. To this end, next week’s jobs report on Friday will be closely watched for signs to the contrary. In the meantime, the team at ATB Economics wishes everyone a happy and safe Canada Day long weekend!

Still a ways to go: Inflation in May

I’m not a seasoned mountaineer, but I’ve gone on enough climbs to know you’re not “done” until you’ve made your way back to where you parked your vehicle. If we apply this to the effort to get inflation under control, price growth running under 3% for five months in a row means we’ve made it down the mountain. Getting to the 2% parking lot will, however, still require a long trek down a twisting path.

May’s inflation reading was one of those twists with year-over-year price growth rising by 0.2 percentage points to 2.9% rather than getting closer to the Bank of Canada’s 2% target. As a result, we think the Bank might hold off on a second interest rate cut until September in order to make sure the increase in May is not a red flag.

Alberta’s inflation rate held steady at 3% in May. While this is a lot better than the 8.4% reading recorded in June 2022, we are also not yet back at the car.

What’s more, the cumulative impact of the high readings is still being felt. Prices in Alberta were 13.8% higher in May 2024 than three years earlier in May 2021 when inflation was just beginning its ascent. Food today costs 19.3% more while shelter costs are 22.4% higher.



More major projects on the go

After May’s disappointing news that Capital Power Corp. was cancelling its plan for a $2.4-billion carbon capture and storage project at its Genesee power plant near Edmonton, the economy got some good news from Shell Canada. The company announced Wednesday that it has reached a final investment decision (FID) for two carbon capture and storage projects. The Polaris project will capture approximately 650,000 tonnes of CO2 annually from the Shell-owned Scotford refinery and chemicals complex located 40 km northeast of Edmonton. In partnership with ATCO EnPower, the Atlas Carbon Storage Hub will provide underground storage for CO2 captured by the Polaris project. Both projects are expected to begin operations by the end of 2028. The estimated cost of the projects has not been released.

Also on Wednesday, the Haisla Nation and Calgary-based Pembina Pipeline Corporation announced a positive FID on the US$4-billion Cedar LNG Project which will be “a floating liquefied natural gas facility with a nameplate capacity of 3.3 million tonnes per annum located in the traditional territory of the Haisla Nation on Canada’s West Coast.” Expected to be in operation by late 2028, it will be the second-largest LNG export facility in the country. Calgary-based ARC Resources Ltd. will be one of the facility’s key suppliers of natural gas.

Weak growth is…good? April’s GDP report

April was a better month for the Canadian economy than March with real output increasing by 0.3% (matching the expectations of economists surveyed by Bloomberg) versus essentially no growth the month before. The advance estimate from Statistics Canada has real GDP rising by just 0.1% in May. This works out to an annualized pace of growth in the second quarter of 1.8%. In the April edition of its Monetary Policy Report, the Bank of Canada pegged growth in Q2 at 1.5%.

The bottom line is that these are weak readings and, even if slightly higher than the Bank of Canada’s forecast, they support the case for additional interest rate cuts before the end of the year with excess supply in the economy enabling it to grow without pushing inflation higher.



Population growth to continue

As we reported on Wednesday, Alberta’s population is projected to grow in all ten of the scenarios developed by Statistics Canada. In the standard medium-growth scenario (called M2), the provincial population cracks the six million mark in 2036 and rises above seven million in 2045. In this same scenario, Alberta is the fastest growing province, posting an average annual growth rate of 1.8% between 2024 and 2048 compared to 1.0% for the country as a whole. Alberta’s share of the national population will increase from about 12% today to 14% in 2048. Only Ontario will add more people over this period in absolute terms at +4.8 million versus +2.5 million in Alberta. The only province projected to have a smaller population in 2048 than today is Newfoundland and Labrador.

International migration will be the main source of Alberta’s population growth, but gains from the movement of people within Canada and from natural increases (births less deaths) are also projected to be positive. Unlike the country as a whole, Alberta is projected to gain residents from natural increase throughout the project period while the national population starts to experience natural decrease (more deaths than births) starting in 2036.

Alberta’s recent population boom* is expected to taper off, but the projections point to it remaining a key driver of economic growth in the years ahead.

*The rapid pace of the recent population growth in the province is attested to by the fact that the estimate for Alberta’s population on July 1, 2024 used in the projections was already 25K below the estimate for April 1.



Interesting Fact…We are all getting older

The aging of the population is, no pun intended, an old story, but the latest population projections from Statistics Canada are a reminder of the significance of the shift. At the turn of the millennium, 10% of Albertans were aged 65 and over. As of July 1 last year, it was 15%. That works out to over 400,000 more seniors.

Looking out to 2048 (the end of the projection period), 19% of the provincial population will be in the 65 and over category and the number of seniors will swell by over 700,000 to reach 1.4 million (M2 medium-growth scenario).

Nationally, the proportion of seniors in the population will grow from 19% last year to 23% in 2048 for an increase of 4.2 million. The economic implications of population aging include everything from greater demand for retirement homes to labour shortages., up 9.6% year over year in May.

Alberta’s housing market has heated up relative to the rest of Canada, and it coincides with people moving here from other provinces. We find a strong relationship between net interprovincial migration and the Canada-Alberta gap in inventory levels (measured by months supply). See the chart below. Similarly, home prices have outpaced the national average during this latest wave of interprovincial migration, after lagging in the years prior.



Chart of the Week: Oil and gas investment projected to rise over time

Whenever I give a presentation on Alberta’s economy, I stress that there is a lot going on here other than oil and gas. I also stress that oil and gas are still a pretty big deal. This is made clear when we consider that 42% of the $69.4 billion of non-residential capital spending in Alberta in 2023 was in the oil and gas extraction sector.*

According to the latest outlook from the Alberta Energy Regulator, nominal oil and gas capital spending (including the “emerging” resources of geothermal, hydrogen, helium, and lithium) in Alberta will increase by $9.1 billion between 2023 and 2033 for an average annual increase of 2.6%. As such, spending will remain well below the historical peak reached in 2014, but the upward trajectory bodes well for both the sector and the Alberta economy.

*Includes support activities for mining, and oil and gas extraction.



Answer to the previous trivia question: The Japanese TV show “Iron Chef” premiered on October 10, 1993.

Today’s trivia question: True or false: Prince Edward Island joined Canada as a province on July 1, 1867.

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