In this week’s The Seven…

• Final jumbo? BofC likely made its last oversized cut
• Mind the gap - Rate divergence and sticky U.S. inflation
• Revenge…of the variable rate 
• Powering AI - Mega data centre proposed in M.D. of Greenview
• Speaking of tariffs - Forestry industry is already paying them
• Next week: Our quarterly outlook!
• Interesting Fact: Honey production in Alberta
• Chart of the Week: Canada vs. U.S. household debt ratios

It was a case of ‘look what you made me do’—our homage to Taylor Swift as she wrapped up her Canadian tour on Sunday. With inflation at target and the Canadian economy too weak to ignore, the Bank of Canada was swayed into making another jumbo rate cut.

Also this week, a big announcement—a massive data centre park has been proposed in Alberta, billed as the largest of its kind in the world. This came on the heels of an ATB Capital Markets report showing data centers (along with LNG) will drive natural gas demand in Alberta.

Next week, our December Economic Outlook is released in what I would argue is one of the toughest forecasts I’ve ever been part of (OK, COVID was trickier). The world is always unpredictable, but with a new U.S. president threatening new tariffs, that cloud of uncertainty has gotten a whole lot thicker (think cumulonimbus). Stay tuned.

Bank of Canada

The Bank elected to go jumbo (a 50-basis point cut) this week, bringing the policy rate to 3.25%. For those keeping track, we made the jumbo call last week, and also prior to the October announcement (cue self-congratulations).

Our sense is that it was not a slam dunk move. There are still some things for the Bank to worry about that could have justified a slower pace—for example, continued wage pressures and early signs of a consumer and housing rebound. Those of us in the jumbo camp pointed to persistent economic weakness (six consecutive quarters of falling per capita GDP), nearly a year with inflation in the 1-3% control range, and an unemployment rate hitting a seven-year high (ignoring the pandemic period).

A few interesting things from the Wednesday announcement we’d like to note:

• Downward revisions likely coming. A new forecast from the Bank won’t be released until the end of January, but the Bank said that recent indicators along with the federal government’s lower immigration targets point to downward revisions to their October growth forecast.
• Reference to tariffs. The Bank didn’t say much about this, other than it adds uncertainty. On the one hand, tariffs are inflationary. On the other hand, they weaken demand. Our view is that the tariff threat may have encouraged the Bank to go deeper now to guard against economic troubles down the road.
• GST cut/rebate treated as ‘transitory’. The Bank is focused on the inflation trend, and said they will look past the ‘transitory effects’ of these measures.

But the most important quote (from the press conference) was this:

“with the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected.”

This is a strong signal that unless anything drastic happens, they’re going back to the boring 25-basis point moves. Our forecast is for 3 more 25-basis point cuts in 2025, bringing the policy rate to 2.5% by June.

Go your own way…Part 2

Fleetwood Mac is back (yes, we’ve used them before), helping us explain U.S.-Canada monetary policy divergence.

Widening interest rate spreads have put downward pressure on the loonie, now trading around $US 0.70/CDN$. The policy rate is 1.375 percentage points lower in Canada, and the 5-year yield spread about 1.25 points lower.

The reason for the divergence? A much more resilient economy and stickier inflation stateside. The U.S. economy has refused to quit. Fleetwood Mac’s “Go Your Own Way” is our best song for the U.S. growth story (because you always need a song).

That’s good news for Americans in almost every department except inflation. This week, U.S. CPI  came in at 2.7% y/y in November, a tick higher than October. Still, that sticky reading won’t be enough to dissuade the Federal Reserve from cutting by 25 basis points next week. But it will keep them grinding down slower than the Bank of Canada.

Why is the Bank drifting so far from the Fed? Because it’s dealing with a much different (i.e. slower) economy. Keeping its policy rate near U.S. levels could cause the economy and inflation to slow too much, unnecessarily risking a recession (a technical one, that is, with former Bank of Canada Governor Poloz suggesting Canada is already in one). What about the loonie? At this juncture the Bank, unlike Canadian snowbirds, probably welcomes the export-boosting/tariff-absorbing effects of a weaker loonie. And with weak inflation pressures at home, the lower loonie on its own won’t be enough to move inflation off the 2% track.

An AI data centre hub? Alberta could be home to the largest

The widespread adoption of artificial Intelligence (AI) promises to unleash a new wave of productivity. For example, Mckinsey finds that generative AI could boost annual labour productivity growth by 0.1-0.6% per year through 2040.

The catch is that large language models like ChatGPT need computing power. Lots of it.

This is where data centres spring into action. According to Goldman Sachs, an average ChatGPT query requires 10 times the electricity requirements of a Google search.

Alberta is becoming a location of choice for data centres. The province has unveiled plans to attract $100 billion of private investment into data centres over the next 5 years.

Recently, there have been some major announcements. Last month, we reported on a new $750 million data center in Calgary, the largest in the province.

Now the big one. This week, news broke that Canadian businessman and investor Kevin O'Leary is planning a massive AI data centre park in the Municipal District of Greenview near Grande Prairie. The first phase would be 1.4 gigawatts at $US2 billion and could reach up to $70 billion if fully constructed. A letter of intent has been signed.

Why Alberta, and specifically Greenview? Plenty of low-cost natural gas, cold temperatures (reducing cooling requirements), and a deregulated market that allows companies to provide their own power. O’Learly also cited an attractive tax environment, a highly-skilled workforce, and the potential to incorporate geothermal power.

AESO reports there are a dozen data projects in the line up in Alberta, requiring 6.5 gigawatts of electricity. According to DOB Energy, if they all proceed, this translates into 1.2 bcf/day of natural gas required.

Forestry industry already faces tariffs

With all this talk of tariff threats from the U.S., it’s easy to forget that Canada’s forestry industry has been hit with tariffs for years. The dispute goes all the way back to 1982.  The U.S. has claimed that the stumpage fees charged on Crown land are an effective ‘subsidy’, compared to the arrangement in the U.S. where producers mostly purchase timber from private landowners. Canada has challenged this claim on a number of grounds, including that U.S. demand for lumber far exceeds their own domestic capacity.

There was some relative peace for years, but the U.S. refiled their complaint and the U.S. Commerce Department has been levying tariffs since 2017.  In August 2024, the Commerce department announced that it was increasing tariffs to an average rate of 14.5%, up from 8% (actual rates vary by company). Canada is challenging these duties.

It is a heavy blow to an industry that has faced a number of challenges, most recently a slump in U.S. housing construction. Through the first three quarters, softwood lumber production in Alberta is flat (+0.4%) over the same period in 2023, and remains below peak levels during COVID.

Interesting Fact…Honey production in Alberta

First, it’s impressive that Statistics Canada has honey production data by province going all the way back to 1924! Second, it’s also impressive that Alberta is the largest honey producer in Canada. Alberta accounted for 43% of honey production in Canada this year by weight and 35% by dollar value. That translates into over 33,000 pounds and almost $76 million. Manitoba was the next largest producer at 19% by weight and 16% by dollar value.

Chart of the Week: Household debt ratios - High, but falling

Why has the U.S. consumer been so resilient amid higher interest rates, while the Canadian consumer has reined it in? Part of the story is household debt. As our Chart of the Week shows, the household debt-to-income ratio continued to rise after the 2008 financial and housing crisis.* In the U.S. a deleveraging process took place, putting Americans in better shape entering the rate-hiking cycle. Many Americans were also shielded by long-term mortgages (30-year terms are common). Toss in a much stronger labour market stateside and it’s little surprise that the Americans have outpaced Canadians in spending.

The good news is that debt ratios are slowly improving. In a report released yesterday, Statistics Canada shows that the debt-to-income ratio in Canada fell for the sixth consecutive quarter. Looking at the full balance sheet, net worth has been improving on the back of rising equity prices.

We don’t have updated Alberta numbers, but the second quarter results show that Albertans continue to have higher net worth, but also higher debt-to-income ratios (third highest after B.C. and Ontario). As we have argued, part of the reason for higher debt ratios in Alberta is demographics—a higher proportion of young families in their high-debt years.

*For the U.S.-Canada comparison, we rely on a standardised measure of household debt to income (including non-profits) from Haver Analytics. 

As 2024 slides into our collective rearview mirror, our trivia questions for the rest of December are looking back at the most important economic trends of the year. Enjoy our 12 Days of Economic Trivia for 2024.

Answer to the previous trivia question: The job vacancy rate in Alberta has declined, but remains relatively high in some sectors. Accommodation and food services, which saw its vacancy rate reach the highest level of any industry at 10.2% in the third quarter of 2021, still had the highest rate as of the second quarter of 2024 (latest data) at 6.3%.

Today’s trivia question: The post-pandemic period of high inflation seems to be behind us, but the cumulative impact remains. How much higher are consumer prices in Alberta compared to three years ago?