indicatorThe Twenty-Four

The Weekly Wrap, June 14, 2024

Neighbours on different paths

By Mark Parsons, ATB Economics 14 June 2024 8 min read

In this week’s ATB Economics Weekly Wrap…

  • Divergence - U.S. and Canada economies 
  • U.S. landing - hard, soft…or not at all?
  • Out of the inflation woods, but not into the clear
  • Getting started - home construction in Alberta
  • Next week - our June Alberta Economic Outlook
  • Interesting Fact: Energy economic facts for the Global Energy Show
  • Chart of the Week: How aggressive was that last rate hiking cycle? 

In this week’s Wrap, we talk about U.S.-Canada economic and rate divergence.

We are putting the finishing touches on our Alberta Economic Outlook to be released next week. If you are a regular reader, you may not be shocked by our new forecast (as we regularly provide updates each week as data are released). But we’ll have a fresh outlook with tables and dynamic charts to complement your summer reading.

A song will accompany our outlook. In March it was “Out of the Woods” by Taylor Swift. In December it was “The Waiting” by Tom Petty. Any guesses for next week?

Thank you to all those who provided responses to last week’s poll (we’re working on an online tool for the future as email surveys are clunky). Results are in (drum roll): 

  • 18% of respondents expect one more Bank of Canada rate cut of 25 basis points this year; 
  • 64% expect two more cuts of 25 basis points each; 
  • 18% expect three cuts of 25 basis points each.

Neighbours on different (economic) paths

Divergent is our word of the week. How much has the U.S. and Canada moved apart?

Let’s count the ways.

The U.S. is on a very different economic path (or boat, whatever metaphor you prefer) than Canada.  

  • The U.S. economy had another positive jobs surprise last month (+272K), posted an unemployment rate of 4%, and per capita GDP is solidly in positive growth territory. 
  • Canada’s economy is struggling to grow, declining in per capita terms, and the labour market is softening with an unemployment rate of 6.2% (5.4% using the U.S. definition).

On the consumer side, lower household debt-to-income ratios and the prevalence of 30-year fixed mortgage rates explains much of the interest rate insensitivity down south compared to here at home.

This is also manifesting in diverging inflation rates. 

  • U.S. inflation is showing some progress, but it’s still in the mid-3s.   
  • Canada is in a much more comfortable sub-3 inflation position, and core readings have been cooperating.

You can also see these differences in the tone and words of the central bank statements.

  • The U.S. Federal Reserve statement highlighted that “economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low.” Inflation gains were characterized as “modest further progress.”
  • The Bank of Canada June statement pointed to cooler conditions, noted that “recent data suggest the economy is still operating in excess supply,” and stressed that there is “continued evidence that underlying inflation is easing.”

Forecasts from the respective central banks also differ. First a qualifier: projections between the two banks are not apples to apples. The Federal Reserve (the Fed) provides a median and range of member forecasts; the Bank of Canada provides a single forecast. Timing is also different (we have fresh forecasts from the Fed, but only an April forecast from the Bank of Canada).

Caveats aside, the Fed’s latest median GDP forecast is at 2.1% in 2024 coming off a 2.5% increase in 2023. The Bank’s penciled in 1.5% for Canada in its April Monetary Policy Report, but that was following a tepid 1.2% last year. Moreover, the Bank’s April forecast for Q1 overshot actuals, so a downgrade is likely in July. In per capita terms, the gap is even wider.

This brings us to our punch line: diverging monetary policy in response to very different economic and inflation conditions. And this has contributed to a weaker loonie and widening spread on two-year yields (see chart). According to the median ‘dot plot’ forecast from Fed officials, only one rate cut is expected in the U.S. this year, compared to what we think will be three in Canada (something our readers seem to mostly agree with).

The spread between 2-year bond yields in Canada and the U.S. has widened

The spread between 2-year bond yields in Canada and the U.S. has widened

U.S landing soft, hard…or not at all?

For all the talk of a hard economic landing, it doesn’t look like much of a landing at all for the U.S. According to the median Fed view, the average unemployment rate will be 4% in 2024 and 4.2% in 2025.

The inverted yield curve was the warning sign of a pending recession. But it’s been that way since late 2022. Our attention has instead turned to Claudia Sahm’s recession indicator: the 3-month moving average of the unemployment rate compared to its minimum of the previous 12 months. However, that indicator has stayed below the 0.5 percentage point recession threshold (0.37 in May).

This doesn’t mean the U.S. is not at risk of a recession—it’s just not in the Fed’s median forecast or in our base case. So far, the second quarter looks decent (the Atlanta Fed’s nowcasting model is tracking 3.1% annualized). The big unknown, however, is inflation. If it proves too sticky for too long, a prolonged rate pause could inflict more damage, and a recession cannot be ruled out.

Out of the inflation woods, not yet into the clear

Last week we argued that Friday’s jobs report reinforced Wednesday’s rate cut by the Bank of Canada. Jobs aren’t keeping up with the fast-growing labour force and the unemployment rate is slowly drifting higher. This supports the Bank’s ‘excess supply’ argument in favour of a less restrictive policy.

There is an asterisk to all this worth considering. According to the Bank of Canada’s June rate announcement, “wage pressures remain but look to be moderating gradually.”

But how much are wages really moderating? Hourly wages have leveled off, but year-over-year (y/y) growth has actually picked up, rising to 5.1% in May. It’s reasonable to expect that with more slack in the labour market that wages will moderate, but the readings are still pretty firm. Alberta, which has been lagging the national average on wage growth in recent years, has seen an acceleration as of late (5.3% y/y in May).

Making matters more complicated is productivity. The same day the Bank of Canada made its rate decision, we learned that labour productivity in the business sector fell 0.3% in the first quarter to its lowest level since 2017. This pushed unit labour costs (i.e. wages per unit of output) up by 1.3% last quarter—not great for inflation.

The combination of sticky wages, languishing productivity and the Fed waiting it out, makes us a little more cautious than some others on rate cuts for the rest of the year and into next. Bottom line: keep a close eye on wages and productivity as key headwinds to the victory over inflation.

Getting started  - Alberta residential construction

Home construction has emerged as an important economic growth driver for Alberta in 2024. Home starts have topped 40K+ (annualized) every month since August, and this week’s data on residential permits point to the same upward trend. Growth is heavily concentrated in the multi-family segment. Calgary has driven much of the provincial gains, a timely response to the jaw-dropping 96,000 (+6%) increase in that CMA’s population last year. Edmonton has joined in with some recent home construction gains of its own. This is an impressive feat for the industry given the interest rate, cost and labour shortage headwinds. Yet many more homes are still needed to catch up. We will be upgrading our housing starts forecast in our outlook next week.


Housing starts and residential building permit value are both on the rise in Alberta

Housing starts and residential building permit value are both on the rise in Alberta

Interesting Facts…about the energy sector for the Global Energy Show

Attendees and delegates from around the world descended on Calgary this week for the Global Energy Show. The Show covered all aspects of energy, ranging from oil and gas, hydrogen, renewables, petrochemicals and LNG.

So what is the economic contribution of Canada’s energy sector? The energy sector encompasses many industries. The largest is oil and gas extraction, but it also includes petroleum refining, petrochemicals, electricity and related services. Fortunately, Statistics Canada maintains a satellite account to capture the broader sector. The direct contribution of the Canadian energy sector for 2023 using this definition was $217.1 billion in GDP (gross value added), $175.5 billion in exports, 271,300 in jobs.

As we’ve noted, energy-related sectors have high levels of labour productivity and wages. Recently released productivity data for 2023 show that the energy sector has a labour productivity rate of $248/hour (in 2017 dollars), which includes $356/hour in oil and gas extraction. This compares to the Canadian business sector average of $59/hour.

Chart of the Week: Bank of Canada rate hikes - A historical perspective

Now that the Bank of Canada has officially pivoted to lower rates, it’s time to retire a chart we’ve used repeatedly. Before we do, let’s take one last look.

Our Chart of the Week compares Bank of Canada policy rate increases since the early 1990s when it started targeting inflation. As shown, the Bank has just completed the most aggressive rate hiking cycle since the early 1990s based on the size and duration of the increase.

With the brake already well engaged, the Bank of Canada can ease off a bit. Even as less pressure is applied, policy will still be much more restrictive than before.

After a long period of interest rate hikes, the Bank of Canada cut its trendsetting policy rate on June 5, 2024

After a long period of interest rate hikes, the Bank of Canada cut its trendsetting policy rate on June 5, 2024

Answer to the previous trivia question: The U.S. Federal Reserve’s “dual mandate” of promoting maximum employment and stable prices was adopted in 1977.

Today’s trivia question: When was the last time the benchmark interest rate in the U.S. was higher than Canada’s benchmark rate?

Economics News

Subscribe and get a quick daily snapshot of what’s happening in Alberta’s economy

Need help?

Our Client Care team will be happy to assist.