The Twenty-Four
The Weekly Wrap, January 19, 2024
Out of the deep freeze
By Mark Parsons, ATB Economics 19 January 2024 7 min read
In this week’s ATB Economics Weekly Wrap…
- Inflation - too hot for comfort
- National business conditions - a little more frost
- Alberta housing activity - warming trend
- Consumer spending - less chill at the Alberta tills
- Chart of the Week: Unpacking 2023 inflation
Just as temperatures recovered from some of the coldest on record in Alberta, a slew of new economic data arrived for some indoor analysis. We unpack this large and mixed bag of data in today’s Wrap.
Bottom line? Sticky inflation will keep the Bank of Canada on hold for now, consumers and businesses appear cautious heading into 2024, and Alberta’s housing activity heats up.
A bumpy ‘last mile’ as inflation stays warm
Inflation remained sticky last month, and progress towards the 2% target has been bumpy. Our view remains that the Bank of Canada will be patient, with the first cut not expected until June. While the economy is clearly slowing, we expect some hawkish language in this Wednesday’s rate decision.
December’s inflation report was not overly reassuring as headline inflation in Canada came in at 3.4%. That part was expected, and Governor Tiff Macklem has talked about the bumpiness (our word) caused by “push and pull” (his words) factors on inflation in the coming months.
More concerning was the core inflation measures remain stubbornly high. Here’s a quote from the December rate decision: “Governing Council wants to see further and sustained easing in core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.” And again in Tiff Macklem’s December speech: “We still need to see more downward momentum in core inflation…”
The two core measures most closely tracked - trim and median - moved higher when you remove base-period effects. Core inflation seems to be ‘stuck’ in the mid-3s for now.
Another report, also released this week by the Bank, reveals something else that’s sticky - inflation expectations. As of the fourth quarter, Canadians still expect inflation to be about two percentage points above target in two years. That’s very little progress from the previous quarter.
Closer to home, Alberta finished the year with a 3.0% y/y inflation rate in December. For the calendar year, inflation averaged 3.3% in the province. That’s elevated, though lower than 3.9% nationally and down from 6.4% in 2022. Transportation costs fell last year while they rose nationally, mainly due to a larger decline in gasoline prices with the fuel tax pause weighing on prices for the second straight year. Alberta also had smaller gains in other categories, including clothing and footwear, recreation and education, household operations, though owned accommodation rose at a faster clip. For more on 2023 Alberta inflation, check out the Chart of the Week.
Canadian headline inflation rate moved up from 3.1% in November to 3.4% in December 2023
Set to reset - mortgage renewals to chill consumer spending
Mortgage resets (at higher rates) are widely expected to hold back consumer spending this year. On that note, a timely paper was released just before the holidays on the impact of mortgage renewals. Through simulations, it estimates that median monthly mortgage payments on existing mortgages are set to rise from $1,200 in Feb 2022 (before rate hikes), to $1,600 by the end of 2027 - a 34% increase. The calculations assume that rates fall in line with market expectations.
We pay the most attention to interest costs as a share of disposable income. For Alberta, our own estimates for debt service (interest only) will rise to nearly 9% of disposable income this year and next, up from 5.8% in 2022, leading to a slowdown in consumer spending.
Cooling trend - business conditions soften
It’s not just households that are feeling the pinch of high inflation and rates. Canadian business conditions have also softened, according to the latest Business Outlook Survey.
Canadian sales outlooks have weakened, investment intentions have moderated, and hiring plans dialed back in the fourth quarter, according to the Business Outlook Survey. The good news? Businesses are less concerned about supply chain bottlenecks and labour shortages. And perhaps most importantly for the Bank of Canada, which has warned about ‘corporate pricing behaviour’, businesses say they plan fewer price increases than before.
Alberta housing market heats up
The housing market has been in a tug of war between two opposing forces. Surging population growth has driven demand higher, while higher interest rates have pulled. With stronger population growth in Alberta, it’s not surprising that recent activity has also been warmer in Alberta and recent price gains stronger.
Alberta home sales rose to their highest level since September last month. In Calgary, sales were flat, but conditions remained tight and benchmark prices continued to rise to a new high of $568K. Edmonton has picked up momentum, with sales rising to their highest since April 2022. While Edmonton prices have been trending higher, and now stand at $380K, they are still about $20K below their April 2022 peak.
The sales-to-new-listings measure is one measure of market tightness, with a ratio above 60 typically characterized as a sellers market. Across the board in Alberta, we observe 60+ readings in 9 of the 11 regions tracked by the Canada Real Estate Association for an Alberta average of 68 (vs. 58 nationally). Another measure is ‘months supply’ of inventory. In Alberta the ratio is sitting at a 2.6 (vs. a 20 year average of 4.9),below the national rate of 3.8.
Overall, the resilience of Alberta’s housing market in 2023 is expected to extend into this year. In an updated forecast released this week, the Canadian Real Estate Association (CREA) expects sales activity to climb 11% in 2024, similar to 10% nationally. However, average prices in Alberta are forecast to post a 6.3% gain - highest in the country and exceeding the 2.3% national increase.
One of the easiest calls to make last year was that surging population would increase housing demand. Less obvious is whether builders could keep up with the record population growth, especially in an environment of higher interest rates, rising construction costs and labour shortages.
2023 ended on a high note for Alberta homebuilding. Starts hit 44,300 (annualized) in December. The trend is undeniably positive after a sluggish first half of the year. But keep in mind that the population has grown by 195,000 over the last year (Oct 1 2022 to Oct 1 2023). So starts are still running well behind household formation. We expect home construction to improve again this year, building on last year’s second half gains.
Less chill at the Alberta tills
Higher interest rates bite with a lag, and we’ve seen that with the consumer this year. But the consumer remains more resilient in Alberta.
Alberta retail sales bounced back in November by 0.6%, fully reversing October’s 0.2% decline. Nationally sales were down by 0.2%.
Year to date, Alberta retail sales have led all provinces except PEI with a 4.6% gain (compared to 2.1% nationally), aided by stronger population and job growth.
Despite the November gain, the trend line has flattened following a late 2022/early 2023 surge. Retail sales are now up a relatively modest 2.5% over November 2022 (see chart). It’s helpful to look at core sales, which exclude more volatile vehicle and gasoline sales. Core retail sales were up a more sturdy 5.4% year-over-year (y/y) in November, compared to 2.1% nationally.
More on retail sales in Monday’s Owl!
Seasonally-adjusted retail sales in Alberta picked up by 0.6% in November 2023
Interesting Fact: The Edmonton International Airport is undergoing a $300 M expansion to create a 2,000 acre International Cargo Hub. The cargo hub will include new runway connections, and new handling and warehousing facilities. The EIA’s location advantage includes shorter circumpolar routes to many parts of Asia.
Chart of the Week: Decomposing Alberta’s Inflation in 2023
Back by popular demand, a relatable look at Alberta’s inflation rate. This time we have a full year of data to work with.
Inflation numbers can be hard to relate to (what was your core inflation rate last year?). In reality, the consumer price index is an aggregate of many things we buy throughout the month, like vegetables, gasoline and clothing.
In the Chart of the Week, we show (in ascending order) which items purchased by Albertans fell and rose in price, and by how much. Put it all together, and you get a provincial inflation rate of 3.3% in 2023.
Consumer prices of some goods such as child care and gasoline eased significantly while inflation was elevated for others such as rent, meat, bakery products and electricity in 2023
Daily trivia
Answer to the previous trivia question: The House of Windsor came into being in 1917 when the name was adopted as the British Royal Family's official name by a proclamation of King George V.
Today’s trivia question: The all-time lowest temperature recorded in Edmonton (either for the city or the airport station) is -49.4°C. In what year was the record set?
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