In this week’s ATB Economics Weekly Wrap…

• Rounding the corner - Bank of Canada pivots
• Spring cracks - Canadian labour market softens
• May dip - Alberta employment takes a step back
• Where did all the inter-jurisdictional employees go?
• Interesting Fact: Energy-driven exports to Japan
• Chart of the Week: Construction workers wanted

It was a busy week. The Oilers advanced to the Stanley cup finals on Sunday, the Bank of Canada lowered its policy rate for the first time since the pandemic on Wednesday, and today we received a Canadian jobs report that further supports the Bank’s decision to start cutting. 

Bank of Canada: One down, more to come

“Pivot, Pivot, Pivvott!”  Ross, Friends episode 16, season 5

It was a tough slog, but the Bank of Canada has finally rounded the corner.

The Bank nudged down its policy rate from 5% to 4.75% on Wednesday - the first decrease since the pandemic, and following the most aggressive and prolonged rate hiking cycle since the early 1990s.

So what are economists going to talk about now? There will be lots (productivity, jobs, trade, etc). Now back to interest rates.

The Bank of Canada made the right call. Sure inflation risks are still alive, but Canada’s economy has not exactly been a star performer and the main thing the Bank cares about (inflation) is cooperating.

The chatter is turning to how quickly the Bank will lower its policy rate and by how much.

We’re in the cautious camp and think the Bank will move relatively slowly, though markets are already starting to price in a cut next month. Our current forecast calls for two more 25 basis point cuts this year, and three next year. Once the dust settles, we see the landing spot around 3% (the Bank’s range for the neutral rate is 2.25-3.25%) - way higher than before, but much lower than 5%.

This nudge down isn’t going to suddenly slash borrowing costs - rates are still high. But it does improve confidence and provides more certainty that rates are indeed moving lower. It also sends a signal that the inflation problem is moving closer to the rearview mirror. This may sound obvious, but it’s a new thing. This time last year no one was talking about rate cuts; recall, the Bank raised rates in June and July of 2023 and core inflation was still running hot.

In short, this first Bank cut is an important turning point and we should pause to acknowledge that. As Tiff Macklem said in the presser in response to a question on the timing of the next cut: “let’s just enjoy the moment for a bit.”

I won’t rehash what I wrote Wednesday in this space (though I kinda already did). For a deeper dive, the fine folks at ATB Capital Markets who know the ins and outs of interest rates published this piece.

For all the talk about the Bank moving ahead of the U.S. Federal Reserve, it’s worth noting that the Bank is not moving completely alone. Just look across the Atlantic. Sweden and Switzerland cut before our central bank, and just yesterday, the European Central Bank announced it has cut its policy rate from 4% to 3.75%.

What do you think the Bank of Canada will do next? Send us a note at theowl@atb.com, and we’ll publish the consolidated (i.e. anonymous) results next Friday! Your choices are:

• no more rate cuts this year, or a hike
• one more
• two more
• three more
• four more

Let’s not get carried away with the size of the cut - assume 25 basis points (or 0.25 percentage points) per cut.

One last thing. When you’re in the forecasting business, you can’t miss an opportunity to talk about when you’ve been right. So here we go. ATB Economics has had a June rate cut in its forecast since last December. Even as early as the fall of 2023 we were expecting a ‘mid 2024’ cut.

Canadian labour market cools, reinforcing Bank of Canada rate cut

In his opening remarks Wednesday, Bank of Canada Governor Tiff Macklem noted that employment is failing to keep up with the working age population. Hence, an unemployment rate that’s risen above 6%. This has contributed to the so-called “excess supply” situation, which has eased inflation pressures. In other words, higher interest rates are ‘working’ to cool the economy - much more than they are in the U.S.

Today’s jobs report reinforces the Bank’s decision on Wednesday in our view. Jobs increased again, by 26.7K in May (close to consensus of +25K), but this was no match for another big increase (54.5K) in the labour force. Hence, a 0.1 percentage point uptick in the unemployment rate to 6.2% - its highest since October 2021.

For the Bank, the one lingering concern from this report are sticky hourly wages, up 5.1% year-over-year.  This will be one to watch, though we still maintain that rising slack in the jobs market should ease these pressures going forward. Overall, this report does not immediately change our thoughts on the trajectory of rate cuts.

Stateside, the U.S. labour market continued to surprise this morning, shrugging off rate hikes. Payrolls topped expectations at +272K gain. The unemployment rate crept higher, but at 4% still remains low. This further supports the Fed waiting it out longer for rate cuts, and the Bank of Canada divergence.

Alberta employment declines

Alberta employment took a step back, falling 20.4K last month and reversing April’s 10.6K gain. This is the first significant decline since last September.

At the industry level, the decline was driven by construction - down 20.3K. This is somewhat surprising given that home construction in the province has kicked into higher gear and job vacancies in the industry are high (see the Chart of the Week below). Seasonal factors may have played a role (a milder winter could have boosted previous months more than normal) and labour shortages themselves may also be weighing. Employment in this industry is volatile, and we saw a similar decline in September before bouncing back briskly.

Service sector jobs were flat, with more in the accommodation and food services sector and less in trade (retail and wholesale). Employment fell the most in the public sector, and all last month’s losses were in full-time positions.

Looking beyond the monthly swings, the longer-term trend shows Alberta still outpacing the country as a whole. Over the last 12 months, Alberta employment is up 2.7% vs the national increase of 2.0%. This overall growth has been led by a 4.3% increase in private sector employees (vs. 1.3% nationally).

The unemployment rate rose to 7.2% on softer employment, and the participation rate backed down from a 15-month high last month and now sits at 69.4%.

Alberta’s fast-growing population and labour force means that employment has to grow at a fairly rapid clip to prevent the unemployment rate from rising. In the last 12 months, Alberta has added 112.8K to its labour force ranks. That translates into 4.3% growth - among the highest gains (outside the COVID period) since the 2006-07 jobs boom (see chart).

Labour mobility shifts -  Fewer out-of-province workers, but more remote workers

We’ve been talking a lot about housing affordability and migration. In case you missed it, here’s our paper on the resurgence in interprovincial migration to Alberta and the important role of housing. One of the factors that has contributed to migration movements is remote work.

There is another type of labour mobility that does not involve migration.  Sometimes called “fly-in, fly-out” or the out-of-province “shadow” population, the technical term is inter-jurisdictional employees (IJEs). These are individuals who retain their residency in another province or territory, but work in Alberta.

In Alberta, during the oil and gas boom of 2004-2008, then again between 2011 and 2014, the number of IJEs surged. But the numbers have dropped significantly since 2014.

Unfortunately the statistics are old because Statistics Canada has to match T1 tax forms (based on residency) and T4 forms (based on location of employment). But Alberta Treasury Board and Finance has just released an update to 2020.

The peak in IJEs was 146,400 in 2014. That fell by almost half, reaching only 78,500 in 2019 just before COVID, with particularly large losses in construction and oil and gas extraction. Of course, there was a big drop in 2020, but that was an anomalous year so we won’t read much into that. The declines occurred across residents from all provinces, but were particularly pronounced among residents of Atlantic Canada.

In summary, the province has seen major shifts in labour mobility patterns. The number of  IJEs in Alberta has declined, but the number of workers who work remotely in Alberta has surged. 

Interesting Fact:  Alberta exports of propane to Japan

We touched on it last week with the announcement of AltaGas and Vopak joint venture - the Ridley Island Energy Export Facility (REEF). Now the export data. With new terminals added in British Columbia, Japan has become a major buyer of Liquified Petroleum Gases (LPG), namely propane, from Canada.

In fact, Japan became Alberta's second largest export market in 2022 due to surging propane shipments, before China once again took top spot in 2023. Liquified propane exports went from zero in 2019 to $1.8 billion in 2022 before easing in 2023 mainly due to lower prices.

Volumes of LPGs to Japan are set to increase further based on the REEF, scheduled to start 2026.  According to AltaGas CEO Verna Yu, “AltaGas delivers more than 19% of Japan's propane and 13% of South Korea's LPG imports, connecting our upstream customers with customers in Asia.”

Chart of the Week: In the Trades? You’re wanted.

Home construction has kicked into high gear in Alberta, with housing starts exceeding 40,000 annualized every month since August 2023. An impressive feat for the industry given the headwinds of higher rates, costs, and (as we’ll see) labour shortages.

But many more homes need to be built to catch up and then keep pace with the booming population. There’s lots of discussion about ways to fix the housing supply challenge. The one headwind that keeps jumping out in the data are construction workers. There are not enough of them. In addition to housing, some big industrial projects are also underway (e.g. Dow’s Path2Zero in Fort Saskatchewan) in Alberta that are driving labour demand.

Our Chart of the Week shows that the job vacancy rate - the share of unfilled jobs as a share of jobs required - has eased since mid 2022 overall. But vacancy rates are still elevated in construction, particularly for specialty trade contractors.

Answer to the previous trivia question: According to the Royal British Legion, the term D-Day refers to the beginning of an operation. The “D” stands for “Day,” meaning it’s actually short for “Day.” Before the allied attack in June 1944, there would have been many D-Days, however it was so iconic that it came to be used solely when referring to the beginning of Operation Overlord.

Today’s trivia question: With June being Pride Month, what event that took place on June 28, 1969 in New York City is considered to have sparked the 2SLGBTQ+ rights movement?