indicatorThe Twenty-Four

The Weekly Wrap, May 17, 2024

Will more (inflation) data clear the fog?

By Mark Parsons, ATB Economics 17 May 2024 10 min read

In this week’s ATB Economics Weekly Wrap…

  • Still foggy in the U.S. - More inflation progress needed to convince Fed 
  • Next week - Canadian inflation data!
  • Wildfire watch - oil and gas production risks
  • Hammering home - Alberta residential construction heats up; resale market remains tight
  • New report on interprovincial migration - coming Tuesday
  • Interesting Fact: Alberta’s labour force surges
  • Charts of the Week: Getting real (and nominal) about…provincial GDP per capita

The inflation watch continues. U.S. inflation progress has been painfully slow, which should keep the U.S. Fed on hold longer than the Bank of Canada. We get the much anticipated inflation report for Canada this Tuesday ahead of the June 5 rate decision.

Why have so many people moved to Alberta? We discuss this in detail in a new report coming out this Tuesday. The motivation behind the paper was a scatter plot, which left me scratching my head. Stay tuned.

In other news, we watch for potential wildfire economic impacts and dig into provincial GDP per capita.

U.S. Fed will remain cautious despite some modest ‘core’ progress

On Tuesday, the U.S. Federal Reserve Chairman Jerome Powell remarked: “We did not expect this to be a smooth road, but these [inflation readings] were higher than I think anyone expected.”

Fast forward to Wednesday, and the inflation data for April showed some progress, but far from anything that could point to victory.

Annual CPI inflation clocked in at 3.4%, down from 3.5% in March. Not much to get excited about.

The core measures of “underlying inflation” showed some progress. The non-energy and food CPI rose 0.3% in April versus the 0.4% reading in March, the first monthly deceleration in six months. Still, the year-over-year core reading is running too hot for comfort at 3.6%.

In a case of ‘bad news is good news’,  U.S retail sales in April stalled, falling short of expectations. The U.S. consumer has refused to quit amid higher rates. It seems that higher rates are (finally) taking their toll on the consumer, which should take some inflationary heat out of the economy.

Bottom line: This week’s data renewed some hope that past rate hikes are finally doing the trick. But the Fed will want to see a whole lot more before its first pivot. As for markets, June is basically off the table for the first cut, July is doubtful, and the greatest odds are priced in for September.

Wildfire season poses a near term risk to energy production

Wildfires have been a more common occurrence in recent years, and this year looks to be no different.

The community of Fort Nelson and area in northeast B.C. and parts of Fort McMurray Alberta are under evacuation orders. While the outcome is far from certain (some recent rain will help), we know that fires can take a heavy personal toll, destroying property and uprooting lives.

The near term impact on the economy will depend on what is disrupted and how much.

Last year, the impacts mainly flowed through Alberta’s largest export - oil and gas production. In the month of May, and early June, production was temporarily curtailed or shut-in, primarily natural gas and natural gas liquids. At one point in May, about 300,000 barrels per day of crude oil equivalent was off line. Fortunately, conditions improved, and the decline was limited. National oil and gas GDP declined about 4% in May and fully recovered by July. All in, the disruption to production shaved less than 0.1% from Alberta GDP growth last year.

But impacts could be much higher. The 2016 wildfires in Wood Buffalo provide an indication of the downside risk. The 2016 fires hit the major production center in Alberta’s oil sands region, temporarily shutting in as much as 1.5 million barrels per day of oil production. That year the drop in oil and gas GDP was a staggering 15% in May. The  estimated impact to Alberta’s annual GDP that year was a reduction of 0.6 percentage points.

As for this year, it’s too early to predict the impacts. Producers have taken proactive measures to minimize impacts, and some have built in fire risk into their production guidance. But the situation can change quickly, and we’ll be monitoring any impacts as the situation unfolds.

Related to the dry conditions, producers noted in the ATB Capital Markets Energy Sector Survey that potential water shortages pose a modest (exploration and production - E&P - companies) to significant (energy services companies) risk to upstream operations. ATB Capital Markets attributes the diverging views, in part, to the highly regionalized nature of drought conditions: energy services companies operate across the Western Canada Sedimentary Basin, while only certain E&Ps would be impacted.

The spring 2016 wildfires had a bigger impact on oil and gas GDP than the 2023 wildfires

The spring 2016 wildfires had a bigger impact on oil and gas GDP than the 2023 wildfires

Encouraging signs on the home construction front

We all know Alberta needs more homes. The population has surged, and housing markets are tight. Prices and rents are rising.

With that in mind, it’s encouraging to see the supply picture improve in the province. Alberta home building has picked up since mid 2023, and the latest data show no signs of slowing.

First quarter residential permits were up 40% over last year, and housing starts held above the 40,000 annualized pace for the ninth straight month. Growth is concentrated in multi-family units. Calgary saw a big jump in starts last year, and now Edmonton is picking up.

This is a step in the right direction, but many homes need to be built. Alberta added over 70,000 households last year (our estimate), yet home starts were about half that. CMHC pegs the supply gap in Alberta at about 130,000 homes by 2030.

Our attention has turned to labour. The construction job vacancy rate is very high (3.3 percentage points higher than pre-COVID levels) – a limiting factor bringing on new supply.

High interest rates aren’t helping either. The Bank of Canada is no doubt concerned that lower rates could ignite shelter inflation as would-be buyers move off the sidelines. But it would assist housing developers on the supply side.

Speaking of housing…

The latest resale numbers show that Alberta’s housing market remains tight, with prices rising across most of the province over last year. While sales edged lower last month, listings have been trending lower.

The sales to listing ratio is 78, well above 53 nationally. Months supply of inventory is only 2.4 - well below the 4.2 national average. Calgary heat has spread to Edmonton, where activity has picked up markedly (unit sales up 39% y/y in April).*

Alberta housing is getting more expensive, but keep in mind that benchmark prices as of April are still $213,300 below the national average ($142,300 below in Calgary).

*All numbers seasonally adjusted

Next Week - Canadian Inflation

We are seeing what we need to see, but we need to see it for longer to be confident that progress toward price stability will be sustained.”

-Tiff Macklem, Governor of the Bank of Canada, April 10, 2024

This is it. The data we’ve been waiting for ahead of the June 5 Bank of Canada decision.

We argue that most conditions are largely in place for a rate cut. The Canadian labour market has softened (employment is struggling to keep up with the population), Canadian GDP growth has cooled off after a strong start to the year, and core inflation readings have been trending lower.

So what’s holding the Bank back? Hesitation may come from still elevated wage inflation, sticky inflation expectations, and the U.S. Fed on hold longer.

But it mainly comes down to the inflation numbers. Bank of Canada Governor Tiff Macklem has been clear he needs to see more evidence that the cooling trend will hold.

As for April core inflation, base period effects will help. A flat or similar month-over-month reading in the median and trim core measure will result in another cooling in year-over-year growth. But a re-acceleration could easily put the Bank on hold.

Since December we have been calling for a June 2024 cut, but have started to place greater emphasis on July (mainly in light of U.S. developments).

We usually don’t get this excited about data, but Tuesday’s report will determine where we lean next.

In Alberta, we expect the annual inflation rate to decline again. Energy has been a major driver, but some base period effects are coming off. Electricity prices are likely to fall or stay flat year-over-year as the rate cap was no longer in effect in April 2023 and the final month of rebates that month was smaller. The April regulated electricity rate was similar to March. As for natural gas prices, regulated rates are also below year-ago levels. That leaves gasoline prices being the main contributor to energy price gains, while rents will continue to put pressure on overall inflation.

Interesting Fact: Fastest annual labour force growth since 2007 (outside COVID)

How can an economy add over 10,000 jobs in one month and yet see its unemployment rate rise from 6.3% to 7%?

That’s what happened in Alberta last month. The short answer is it takes a mighty big increase in the number of people entering the labour force (those working or looking for work).

Alberta added a whooping 32,000 people to its labour force in April. This was due to continued  population growth and more of the existing population joining the ranks of the labour force. The participation rate hit a 15-month high (primarily due to a higher youth participation rate).

Year-over-year growth in the labour force was 5% - the highest (outside the COVID period) since the 2006-07 jobs boom.*

What’s next? The participation rate is expected to ease from current levels and population growth is forecast to slow. This should take some upward pressure off the unemployment rate, but we still see it holding above 6.5% before easing later in the year. Our current tracking is for a 6.4% annual unemployment rate this year (matching the year-to-date average).

*COVID growth rates are influenced by massive disruptions, resulting in huge declines followed by big spikes.

Alberta's labour force has been posting strong growth

Alberta's labour force has been posting strong growth

Charts of the Week:  Getting real (and nominal) about provincial GDP per capita

Canada’s economy is eking out modest growth, but declining in per capita terms. This has ushered in a national conversation about Canada’s productivity woes, with a noteworthy and timely “break the glass” speech from Senior Deputy Governor of the Bank of Canada Carolyn Rogers.

What about the provinces? Economic growth has struggled to keep up with population growth across the country. All provinces, including Alberta, have witnessed declines in their per capita output.

With all these recent changes, how does Alberta stack up against other provinces on GDP (gross domestic product) per capita?

Before we dive into that, what do we mean by GDP? There are two main metrics - both are important.  

  • Real GDP is the quantity of Canadian economic output holding prices constant (in this case 2017 dollars). It strips out fluctuations in the price of what we produce – things like wheat, crude oil, manufactured goods and professional services. Real GDP is used for another metric - labour productivity, which measures the quantity of what is produced per hour worked (i.e. real GDP per hour). Real GDP is what’s most widely reported. You may have heard the Canadian economy grew by 1.1% last year - that’s referring to real GDP.   
  • Nominal GDP, on the other hand, is a measure of the value of what we produce in current dollars. For this reason, it’s probably more relatable to most (you don’t file your taxes in 2017 dollars). Nominal GDP is a measure of income earned from the production of goods and services in an economy. It’s also a broad measure of the government’s tax base. The federal and provincial governments earn revenue by taxing components of nominal (not real) GDP. 

Alberta and Saskatchewan generate by far the highest nominal GDP per capita, thanks to strong commodity prices, higher levels of (real) labour productivity and employment rates. This has long been the case for Alberta going back to the early 1980s. Saskatchewan has recently moved closer to Alberta, propelled by higher commodity export values (e.g. oil, potash, crops and uranium). Though the quantity produced per person has declined (i.e. real GDP per capita), the value has increased due to higher output prices. These two provinces are about one-third above the national average on this metric.

As for real GDP per capita, Alberta remains far above all provinces, including Saskatchewan. But the gap between Alberta and the national average has closed significationaly since 2014, prior to the sharp decline in energy investment.

Nominal GDP is a measure of the value of what we produce in current dollars

Nominal GDP is a measure of the value of what we produce in current dollars

Real GDP is a measure of the quantity of economic output holding prices constant

Real GDP is a measure of the quantity of economic output holding prices constant

Answer to the previous trivia question: A monkeyboard is the small platform on a drilling rig that the derrickman stands on as pipe is run into or out of the hole.

Today’s trivia question: How many births were there in Canada in 2023?

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