The Twenty-Four
The Seven, January 3, 2025
Turning the page | By Mark Parsons, ATB Economics
3 January 2025 6 min read
In this week’s the Seven:
- Rearview mirror: data released over the holidays
- Final tally: lower loonie, higher equities, and flat oil prices
- What’s your scenario? Our 2025 Outlook
- Next Week: Final jobs report of 2024.
- Chart of the Week: Inflation progress
Welcome to 2025! We’re back with our first The Seven of the year. I don’t make many New Year’s resolutions, but I’m going to try one on for size - brevity.
Today’s Seven will quickly bring you up to speed on the latest data released over the last two weeks, give a final tally on some key financial metrics, and summarize our 2025 outlook released just prior to Christmas.
Looking in the 2024 rearview mirror
Over the holidays, my hunch is that most of you were participating in activities that did not involve economic data releases. In case that’s you, we’ve provided a brief summary below.
- National GDP - better, but not great. Released just before Christmas, October GDP advanced by a decent 0.3%. Noteworthy for Alberta, oil and gas extraction made the largest contribution to national growth in October, spiking 3.1%. With the advance estimate for November showing a 0.1% decline, fourth quarter GDP is tracking around 1.5-2% growth. That’s better than Q3’s 1%, but still sluggish given robust population growth and continuing to underperform U.S. growth.
Bottom line: The GDP data does not change our view that with inflation at bay and the economy in excess supply, the BofC will keep cutting in the first half of 2025. - Retail sales - tentative signs of life. It was a slow year for retailers in Canada, including in Alberta. With October’s reading now in hand, we expect that Alberta retail sales rose 0.6% last year despite blistering population growth of 4.4%. Consumers felt the weight of higher interest rates and higher prices last year. And they entered the holiday season in a cautious stance, likely spending more than the previous year, but still holding back. But with rate cuts and inflation now cooperating, the tide is slowly turning - Alberta led all provinces except Newfoundland in year-over-year sales growth in October at 4.5%. We see retail sales growing 3%, on average, next year.
Retail spending in Alberta was sluggish in 2024, but has posted some recent monthly gains
2024 Financial Review: Higher equities, flat oil, and a softer loonie
Canadian equities rallied in the second half of the year, anchored by financials, tech, industrials and consumer staples, but could still not catch the faster-starting S&P 500. On December 31, the S&P/TSX composite closed 19% above the January 2 level.
Oil prices went on another wild ride in 2024, with West Texas Intermediate (WTI) ranging from a low of $US 66.7/bbl (September 10) to $87.70/bbl (April 5). The war in the Middle East, demand woes in China, and extension of OPEC+ cuts were among the factors moving the oil market last year. Despite the turbulence, oil prices pretty much ended the year where they started at roughly $71/bbl. On average, WTI was modestly lower at $76.1 last year vs. $77.6 in 2023 (though, aided by the Trans Mountain Expansion (TMX), Western Canada Select prices improved by more than $US 2/bbl). Our forecast is for WTI to average $70 in 2025.
The loonie was a casualty of U.S.-Canada economic divergence in 2024. The Canadian economy was soft relative to the U.S., and inflation milder. That put the BofC in a position to cut its policy rate more aggressively than the U.S. Federal Reserve. Tariff threats have created more recent headwinds. The Canadian dollar finished 2024 at 69 US cents compared to 75 US cents on Jan 2, 2023. We see the loonie averaging 71.3 US cents this year.
Both the S&P 500 and the S&P TSX Composite indices made sizable gains last year
Our 2025 outlook - Shifting sands
We put out a new outlook just before the break, which I discussed on CBC Edmonton AM over the holidays.
In short, the new year brings more hope on the inflation front, but new concerns on the trade side.
Let’s start with inflation. The Bank of Canada has become less worried about inflation and more concerned about downside risks to growth. It’s easy to downplay the progress, partly because consumers are still contending with the aftershocks - very high prices today and a new higher ‘normal’ for interest rates. But, as our Chart of the Week shows, there has been significant progress. We see the Bank of Canada cutting three more times in the first half of 2025, bringing the policy rate to 2.5%.
Now turning to the new headwind - trade uncertainty. We see businesses staying cautious on their investment plans as they await what U.S. President-elect Donald Trump does on the tariff front.
What does this mean for Alberta? The provincial economy is entering 2025 with momentum. Home building is booming (housing starts at their highest since 2006-07), oil production has ramped up with TMX coming on line, and some major projects like Dow’s Path2Zero are underway. According to our base case forecast, we see Alberta being among the growth leaders (if not the leader) this year with 2.5% real GDP growth.
Nation-leading population gains have provided a jolt to economic growth. That impact will fade next year with new federal immigration targets, though we see the provincial population still growing 1.9% this year due to steady streams of interprovincial migrants and a smaller temporary resident pullback than other provinces.
Our base case is premised on some form of tariffs, but not the worst case trade war scenario (25% tariffs and counter-traiffs) which according to our estimates could lead to a contraction in GDP. On the upside, which assumes a very light tariff touch and major projects proceeding, we could see 4% growth. Those ranges may seem wide, but we’re just being honest about the uncertainty out there.
Buckle up. 2025 will be a wild ride! We look forward to keeping you informed and providing our latest insights.
Next week - Final jobs report of 2024
After starting the year with a bang, employment in Alberta leveled out in the second and third quarter, only to take off again in October and November. Alberta led all provinces in absolute job gains in these two months. Yet unemployment has remained elevated with the influx of migrants to Alberta, many in search of work. Heading into the new year, we expect to see more 7%+ unemployment readings amid sturdy population growth, but then creeping below that mark as labour force entry slows. Our unemployment rate forecast is 7% in 2025 with employment growth of 1.8%.
Chart of the Week - Inflation progress in 2024
What a difference a year makes.
When we entered 2024, national inflation was elevated at over 3% and the Bank of Canada was holding its policy rate at 5%.
Fast forward to today, and the latest inflation reading is 1.9%, and the Bank of Canada has slashed its key rate to 3.25%.
This is a major turning point, providing a tailwind to growth in 2025.
Answer to the previous trivia question: There are eight scheduled Bank of Canada interest rate announcements in 2025 with the first one taking place on January 29.
Today’s trivia question: Donald Trump will start serving his second non-consecutive term as U.S. President on January 20. How many other U.S. Presidents have served two non-consecutive terms?
The Canadian headline inflation rate stood at 1.9% in November while the Bank of Canada’s policy rate eased to 3.25% in December
Economics News