In this week’s The Seven…

• Strong finish - Alberta labour market ends 2024 on a high note
• The resignation - new wave of (domestic) policy uncertainty
• Trump turbulence - more tough tariff talk
• Not so fast - U.S. Fed more cautious on rate cuts
• Trade fuel - Energy propels Canadian exports in 2024
• Interesting Fact: The Nixon Shock
• Chart of the Week: Holiday hangover - spending in January

Don't the hours grow shorter as the days go by

You never get to stop and open your eyes

One day you're waiting for the sky to fall

The next you're dazzled by the beauty of it all

—“Lovers in a Dangerous Time,” Bruce Cockburn (original) and Barenaked Ladies

OK ‘lovers’ may be strong, but it’s fair to say that the U.S. and Canada are mutually dependent economic friends. It is also fair to say that this is a dangerous time with Donald Trump once again threatening tariffs on Canada, most recently suggesting he could use ‘economic force’ to acquire Canada (yes, you read that right).

If that’s not enough, federal policy is now in flux with Prime Minister Trudeau announcing earlier this week that he will resign once a new Liberal Party leader is in place and Parliament prorogued until late March.

Deep breaths. We unpack all this today, starting with a surprisingly strong jobs report received this morning.

For a lighter touch, our Chart of the Week looks at retail sales post-holidays and asks: how much is this related to new year’s spending resolutions?

No strangers to the devastation of wildfires here in western Canada, our hearts go out to everyone affected by the wildfires in the Los Angeles area.

Holiday surprise - Jobs surge in December

Hot off the presses, we talked about the latest jobs report in this morning’s Twenty-Four. The Coles Notes is that Alberta just recorded its largest job gain since the pandemic recovery, and the unemployment rate fell in line with the national average.

A very strong showing to end the year and as we enter a period of geopolitical turmoil.

A fragile time

As Canada gears up for the Trump presidency, it faces its own political instability at home.  Until March 24, there will be no Parliament in session. A federal Liberal leadership race is underway that will determine who is the next Prime Minister of Canada, though that may be short lived as a spring election after the return of Parliament is widely anticipated. And if current polling holds, we could see a change in government.

We are not political analysts so we won’t speculate on leadership races or election results. But we do need to sort out how these developments could alter the economic outlook.

Let’s first consider the starting point. Canada’ economy enters this latest bout of political uncertainty in a weakened state: GDP per capita has declined for six straight quarters and the labour market has softened. The good news is that inflation has been wrestled to the 2% ground and Canadians will get the tailwind of past and future rate cuts. Just in time for a new battle—a geopolitical one.

To counter the tariff threat, the federal government has proposed a $1.3 billion border security plan, but going forward it will need to rely on executive powers not requiring parliamentary approval.

Post election, we will be watching for potential shifts in federal policy that could impact Alberta, specifically as it pertains to energy—by far the province’s largest industry.

The federal government’s purchase of the Trans Mountain pipeline system enabled the expansion project to reach completion last spring, but the oil and gas industry has voiced concerns over other federal actions, namely the proposed Oil and Gas Sector Greenhouse Gas Emissions Cap Regulations, Bill C-48 (the Oil Tanker Moratorium Act),  Bill C-69 (the Impact Assessment Act), and Bill C-59’s anti-greenwashing provisions. ATB Capital Markets’ Fall 2024 Energy Sector Survey points to federal energy and environmental policy as the top risk among industry respondents. Canadian oil and gas stocks climbed after Trudeau announced his intention to resign.

The oil and gas emissions cap presented downside risk to our economic forecast and, if it is abandoned, that would address a key growth barrier. At the same time, there is uncertainty over the proposed $16.5 billion Pathways Alliance carbon capture and storage network, which is advanced in planning but has not reached a final investment decision.

Outside energy, there are a number of questions. Would a Conservative government keep the current government’s new (much lower) immigration targets? On fiscal policy, the Conservatives have vowed to cut spending and taxes (eliminate the retail carbon tax, reduce personal income taxes, and remove the federal GST on new homes), but will they respond to Trump’s promised corporate tax cuts?

Social media whiplash

We started the week with hope that a softer touch on U.S. tariffs may be coming. The Washington Post reported on January 6, citing unnamed sources, that the Trump team was preparing for more targeted tariffs—not the broad-based ones Trump has floated in the past.

This relief didn’t last long with Trump posting on Truth Social that he wasn’t backing down. He then went further by telling reporters he would use ‘economic force’ to acquire Canada.

So here we are in ‘wait and see’ mode as the clock ticks down to Trump’s inauguration on January 20.  Our view remains that these are still threats to secure concessions from Canada. We should take them seriously, if not literally.

In the meantime, we’ve published three “what will Trump do” scenarios for the Alberta economy. A base case with 10% tariffs (excluding oil and gas), a pessimistic case with 25% blanket tariffs, and an optimistic case with minimal tariffs.  The base case gives us growth similar to 2024 (nation-leading but not a boom), the low pushes Alberta into a recession, and the high case is almost a boom.

Given this uncertainty, some may ask what’s the point of forecasting at all? I was once told: “I could drive a truck through your forecast range.” Fair enough, but we’re just being honest about the risks out there.  And it’s worth the time forecasting in order to be prepared and to provide some light in the fog.

Not so fast - U.S. Fed cautious on the way down

One of the 2024 themes spilling into the new year is U.S.-Canada economic divergence. The U.S. economy continues to run much hotter than in Canada, and inflation has proved to be much stickier on the way down.  Today’s U.S. jobs report points to continued resiliency, with the U.S. churning out 226,000 new payrolls in December and the unemployment rate falling to 4.1% (the last jobs report under President Biden).

All this is manifesting in different monetary policies. The Bank of Canada has moved quickly including two jumbo 50-basis point cuts and slashing its policy rate from 5% in early June to 3.25% today. The U.S. Federal Reserve (the ‘Fed’) is sitting at 4.25-4.5%, down from 5.25-5.5% in mid-September 2024, and now minutes from the December meeting show that officials are now more worried about the inflationary impacts of trade (read tariffs) and immigration policy. The market is pricing in only about one cut this year.

A larger drop in the bucket - Energy exports to Asia

One of the stories we’re watching closely is the shifting energy trade to Asia.

Two key developments—the Trans Mountain Expansion starting commercial operations last spring and propane export capacity on the west coast—has led to a seismic shift in Alberta’s Asian-bound energy exports. Energy exports to China surged five-fold over the first 11 months of 2024 compared to the same period in 2023.

It’s still a drop in the bucket compared to the U.S. share of Alberta’s energy exports (94% in November), but the development is timely, providing partial insurance against U.S. tariff threats. We expect Asia’s share of Canada’s energy trade to increase further, with LNG Canada poised to start up this year.

This rise in energy exports has added fuel to Canada’s economic growth.  

• Canadian energy export volumes rose 5.8% year-to-date through November 2024, compared to only 0.5% overall (we estimate that volumes would have decreased 0.8% without energy shipments).
• Since 2019 (pre-pandemic), energy has led all export categories with the exception of consumer goods with 10.1% volume growth (vs. only 0.7% overall)

In its latest Monetary Policy Report, the Bank of Canada noted that Canadian export growth will be driven by energy: “Export growth is projected to rise in 2025, boosted by the Trans Mountain Expansion pipeline. In 2026, new LNG [liquefied natural gas] capacity is anticipated to support energy exports.”

Under our base case scenario, we see Alberta export volumes rising 3.5% this year, fueled again by crude oil and manufacturing (namely, petrochemicals and food).

Interesting Fact…the Nixon Shock

If the U.S. applies blanket tariffs on Canada, it won’t be the first time.

In August 1971, President Nixon announced a 10% surcharge on imports as part of the so-called “Nixon Shock.” The stated goal was “to make certain that American products will not be at a disadvantage because of unfair exchange rates.” President Trump introduced tariffs on imports from Canada in 2018, but they were targeted to steel and aluminum products. The Nixon tariffs were much broader, covering about 52% of U.S. imports.

The import surcharge lasted only 4 months, but had a lasting impact. "Buy American" policies have continued to affect the trading relationship.

A study by noted trade economist Douglas Irwin estimated that Nixon’s 10% import tariff resulted in a 2.6% reduction in Canada’s exports to the U.S.

Chart of the Week: Holiday Spending Hangover

We all know that November and December are busy months for retailers in the lead up to the holidays, with more of that spending shifting to November in recent years due to Black Friday sales.

Then the post-holiday spending blues kick in.

In our Chart of the Week, we look at retail sales in the month of January. Retail sales are 15% lower than average* and the spending lull is pretty much observed across major categories.

The biggest January pullback is jewellery stores (they spike in December for Christmas), liquor (dry January?), shoes (sales peak in August before school starts) and building material (January is cold).

For some it may be a New Year's resolution to curtail spending, for others it may just be a normal seasonal habit. Whatever the reason, the January dip is notable. 

Statistics Canada does not have data on spending on gym memberships, but we’re pretty confident that this category goes up in January.

Speaking of new years resolutions, I have not kept mine today. It was ‘brevity’.

*We looked at the period 2017 to 2023, but excluded 2020-2022 due to noisy pandemic effects.

Answer to the previous trivia question: New Brunswick is home to the largest crude oil refinery in Canada. The Irving Oil Refinery in Saint John has a capacity of over 300 thousand barrels per day. Alberta’s five refineries combined, however, account for the largest share of national refining capacity at 30% of the total.

Today’s trivia question: Which province had the highest average unemployment rate last year?