indicatorThe Twenty-Four

The Weekly Wrap, May 31, 2024

Systems ready, but will the BoC actually pull the trigger?

By Mark Parsons, ATB Economics 31 May 2024 11 min read

In this week’s ATB Economics Weekly Wrap…

  • Next Week - The BoC can justify a cut, but may still wait
  • More on population - The Calgary numbers are staggering
  • Chasing affordability part 2? - Inside Alberta edition
  • Ridley Island export project gets green light
  • Slow going - National GDP below expectations
  • Interesting Fact: Still recovering - accommodation and food services
  • Chart of the Week: Evolution of home price differentials - Canada vs Alberta

I can’t believe it's June. Not just because I have no idea where the year has gone, but because the thing we’ve been talking about for nearly a year may actually happen soon: the pivot to lower interest rates.

This one is almost too close to call. We believe the BofC can justify a rate cut next week, but they may still elect to wait until July. The market has odds in favour of a June cut and that’s where we’re leaning as well.

Thought we were done talking about demographics? Not a chance! We dig into the sub-provincial population numbers released just last week. Calgary really jumps out, and it will be interesting to see how migration responds to the widening housing price gaps inside Alberta.

Clear to cut:  Bank of Canada has enough evidence, but may still wait until July

Wednesday is the day that’s been long marked on our calendars. At 7:45 MST, the Bank of Canada will announce its interest rate decision.

Our view is that the Bank of Canada is ‘clear to cut’ based on the latest inflation and economic data. For our part, we’ve been calling for a June cut since December (though July has been a very close second).

To see what we mean by ‘clear to cut’, let’s rewind the clock a bit. On April 10, 2024, at the last rate decision, the Bank was pretty clear on what it needed to see.

From the statement…

“While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained” .

Then in the press conference, Governor Tiff Macklem said…

“What do we need to see to be convinced it’s time to cut? The short answer is 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. The further decline we’ve seen in core inflation is very recent. We need to be assured this is not just a temporary dip”

So what has happened to inflation since the Bank made those statements? Was the “dip” in early 2024 temporary?

There’s lots of ways to slice and dice the inflation data, but it’s pretty clear that inflation has continued to trend in the right direction - lower.

On the headline rate - the overall change in the consumer price index - the last two months have been 2.9% and 2.7% respectively - within the so-called 1-3% control range.

More importantly, core inflation (which measures underlying inflation pressures) has continued to trend lower. Again, from the April 10 press conference: “The more timely three-month rates of core inflation fell below 3% in February, suggesting some downward momentum.”

This is where we’ve seen significant progress over the last two months. The three-month rate* is now below 2% on the main measures and the year-over-year is now below 3%.

The next two charts show the two most popular ‘core’ measures - you’ll find similar looking charts in the April Monetary Policy Report (p. 16), but with the data ending in February.

*The three-month rate is the three-month moving average of core CPI compared to the previous month’s three-month average. This change is then annualized so it’s comparable to the year-over-year numbers. The measure smooths out monthly volatility to help gauge where inflation is trending.





What about the economy? Economic output started the year strong, but has been sputtering (see the discussion on GDP below). Per capita declines in output continue. Job growth was brisk last month, but it was no match for the fast-growing labour force that kept the national unemployment rate at 6.1%.

The U.S. Fed is fighting more stubborn inflation readings stateside and looks to be on hold longer. This complicates the BoC decision by putting some downward pressure on the Canadian dollar (and upward pressure on inflation). But conditions are materially different in Canada, and who said the BoC can’t move alone?

Bottom line: We’ve received two inflation reports since the last rate decision and they are just what the Bank was looking for. Even as rates grind lower, policy will be restrictive as households renew mortgages and other loans at higher rates. In our mind, systems are clear to justify a rate cut next week.

But…there is still a chance the Bank waits to be extra sure that the trend holds before cutting. Perhaps they are concerned about folks rushing into the housing market and igniting shelter costs. Or perhaps they are worried that Canadian dollar weakness from a delayed U.S. Fed cut will fuel inflation.

If the Bank does hold next week, it will be because it is being extra cautious and wants to be absolutely sure that inflation is being wrestled to the 2% ground.

This is almost too close call, but we’re going to trust the market on this - with odds tilted in favour of a BoC cut next week.

A demographic explanation for Calgary’s tight housing market

Last week we talked about the 2023 sub-provincial population numbers released by Statistics Canada on May 22. We examined growth both within Alberta’s four largest urban centres and the areas outside them.

Given the key role population growth is playing in the provincial economy, the topic warrants more attention.

For example, we now have a better understanding why Calgary’s housing market has been so hot, despite interest rate headwinds. Recall that Calgary is the only major city over one million where home prices have actually increased since the Bank of Canada started hiking.

What happens when 96,000 people are added to the Calgary CMA in just one year - a staggering 6% increase? The housing market tightens and prices jump. As of April, the composite benchmark resale price in Calgary was up 10% year-over-year, and the average listed rent for a two-bedroom apartment by 8.8%. Months supply of inventory is at less than 1 month.

Calgary accounted for 52% of Alberta’s population growth in the 2023 census year*, much higher than its share of the population (36%). Edmonton made up another 34% of the gain and the rest of Alberta the remaining 14% (see charts).

*What is a census year and why are we using it? We have data for the calendar year for Alberta, but only for the census year for the regions. The calendar year covers January 1 to December 31, 2024, and the census year covers midpoint to midpoint (July 1, 2023 to June 30, 2024). For the calendar year, Alberta’s population grew 202,000. In the census year, it grew 184,000.







Chasing Affordability - Inside Alberta?

As we note in our recent study, relative housing affordability has played a larger role than normal in driving record net interprovincial migration to Alberta.

Now consider that nearly half (26,700) of Alberta’s net interprovincial migrants landed in Calgary last census year - just under half the total increase of 56,200. Edmonton added another 16,100 from the rest of Canada.

As the ‘chasing affordability’ theme continues to play out, we could see an inside Alberta sub-theme. That is, movements to more affordable markets in the province, either through intraprovincial movements or more interprovincial flows to less expensive markets. We suspect that it’s already underway in Edmonton, as housing prices in that city have picked up steam. Remote work, for those with that flexibility, makes movements more possible than in the past.

Calgary housing has become more expensive in the last two years. The gap between average Canadian home prices and Calgary prices has closed significantly, though still remains wide by historic standards (see our Chart of the Week).*

In Edmonton, the price gap is much larger; indeed, wider than any other large city over one million.

According to a recent report by Royal Lepage, Edmonton is in fifth place among Canadian cities for housing affordability, with Red Deer in third. Survey respondents in the study ranked Edmonton the top choice for relocation among those in the Greater Vancouver and Toronto area if they were able to find a job there or work remotely. Looking outside the major centers, home prices on other Alberta locations are well below Calgary levels (see chart).

Bottom Line: Population movements are based on relative conditions. So even as housing gets more expensive in Calgary, we should still expect inflows in that city from even more expensive markets in B.C. and Ontario. Much also depends on the state of local labour markets. But as the ‘chasing affordability’ trend plays out, we expect to see more shifts to more affordable markets in Alberta in the coming months. That is, ‘chasing affordability part 2’ - the inside Alberta edition.

*The national average is heavily influenced by more expensive markets in B.C. and Ontario, where Alberta has been drawing most migrants from. April benchmark house prices in B.C. were $967.7K and $867.1K in Ontario.



AltaGas green lights Ridley Island export facility

There has been much talk about the important progress made on western Canadian LNG export capacity, with LNG Canada Phase 1 expected to begin commercial operations next year and Coastal GasLink finished construction.

Flying under the radar is a surge in Liquified Petroleum Gas (LPG)* exports to Asia, particularly Japan. In fact, Japan temporarily displaced China as Alberta’s second largest market in 2022 due to a spike in propane shipments.

LPG capacity will increase further with AltaGas recently reaching a positive final investment decision on its Ridley Island Energy Export Facility (REEF). The project, with an estimated cost of $1.35 billion, is expected to come online by the end of 2026.

*LNG (Liquefied Natural Gas) is natural gas (methane) in cryogenic storage. LPG (Liquefied Petroleum Gas) is mainly propane and butane alone or in mixtures in liquid form under pressure.

Canadian GDP sputtering

Today’s GDP report points to underlying softness in the Canadian economy.

Real gross domestic product advanced by 1.7% (seasonally adjusted annualized rate) - below consensus estimate of 2% and well below the BoC’s tracking of 2.8% from April. While the details are better than the headline (a slowdown in inventories subtracted from growth), the overall growth pattern has been sluggish. Netting out Canada’s fast growing population, real GDP per capita continues to decline.

Moreover, the final quarter of last year was revised down to effectively no change (0.1% annualized) following a 0.3% third quarter contraction. This means the country narrowly dodged a ‘technical recession’ of two quarters of negative growth.

At the industry level, one of the main drivers of first quarter growth was the public sector, in large part driven by the conclusion of the Quebec public workers strike which disrupted activities in November and December. While April advance estimates are more upbeat (+0.3% m/m), smoothing through the monthly swings points to a Canadian economy is hobbling along. This report should not sway the BoC to delay rate cuts.



Interesting Fact: Accommodation and food services output still below pre-COVID levels

COVID caused widespread disruptions, but some industries were more impacted than others. Consider Canada’s accommodation and food services sector. From peak (December 2019) to trough (April 2020), monthly output in the sector fell a staggering 64%. The sector has staged a remarkable comeback, but real GDP (which holds prices constant) has still not fully recovered to pre-pandemic levels. In March 2024 national real GDP in the sector was 8.4% below the pre-COVID peak.

Chart of the Week:  Alberta - Canada home price differentials

Our Chart of the Week shows benchmark home prices* in Edmonton, Calgary, and Alberta against the national average (negative values indicate prices below the national average).

Alberta home prices used to be roughly on par with the rest of the country. That changed in early 2015. An economic slump in Alberta and some out-migration to other provinces, contributed to a prolonged period of relatively flat home prices. The gap between Alberta and Canada widened further in the COVID period.

However, over the last two years, with home prices picking up in Alberta, the gap has narrowed from a record high of $378K in February 2022 (just before rate hikes) to $213K as of April 2024. This narrowing has been driven by Calgary. Edmonton’s market has lagged, with the benchmark price in the capital a record $193K lower than in Calgary.

But conditions are shifting in the Edmonton market, with resale activity picking up markedly in Edmonton since the spring of 2023. As of April, unit sales were up 40% y/y and prices 5.5% higher.

*The MLS benchmark home prices are used for the comparisons as they control for different housing attributes and measure a ‘typical’ home. This allows for more meaningful comparison across time and markets. On the other hand, average residential prices can reflect changes in buying behaviour (e.g. buying more expensive homes in a month will raise the average) that do not necessarily reflect changes to the ‘typical home”.  Unfortunately, Alberta benchmark prices are not available outside of Edmonton and Calgary.



Answer to the previous trivia question: According to Guinness World Records, Ray Tomlinson sent the first email in 1971.

Today’s trivia question: Which national park is Canada’s largest?

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