In this week’s The Seven…

• Long way around - U.S. interest rates 
• Summer vacation - Canada’s economy slows in Q3
• Powering AI - New data centre announced in Calgary
• Pendulum swing - New federal immigration targets
• Not the same - Higher interest rates have differential impacts
• Tariff watch - All eyes on U.S. election
• Interesting Fact: Alberta’s Industrial Heartland turns 25
• Charts of the Week: Stateside - Exports to the U.S

I've been a long time gone now

Maybe someday, someday I'm gonna settle down

But I've always found my way somehow

By takin' the long way

Takin' the long way around

—“The Long Way Around,” the Chicks

I’m not sure the Chicks wrote this song thinking that an economist in Alberta would use it to explain Canada-U.S. monetary policy divergence.

U.S. interest rates will take more time to settle lower—taking the long way around. The different glide paths reflect two very different economies.

In Canada, growth has slowed to a crawl despite rapid population gains. The unemployment rate has risen and excess supply in the economy has built up. This is creating a disinflationary trend. New (lower) immigration targets will pose further downside to Canada’s population-driven GDP growth.

In the U.S., the economy refuses to quit. Third quarter GDP came in a sturdy 2.8% (annualised, initial estimate). Job growth slowed to only 12,000 last month, but that was largely hurricane and strike related and the unemployment rate sits at just 4.1% (U.S. definition). Nonetheless CPI inflation is trending lower, aided by stronger productivity performance.

The result is (monetary) policy divergence and differing expectations on the path forward as well. Both the 2-year and 5-year government bond yield spread between Canada and the U.S. has widened significantly (see the chart on 5-year bond yields).

These widening differentials are putting downward pressure on the loonie, now around US$ 0.72/CAD. We see the Canadian dollar remaining soft, but gaining slightly against the greenback next year as the Fed easing cycle becomes more entrenched.

Summer vacation - Canada’s economy slows in Q3

Canada’s economic growth took a step back over the summer.

August GDP was flat after an increase of only 0.1% in July. With September’s advance reading (0.3%), Canada’s economy is on pace to expand by around 1% (annualised) in the third quarter. That’s lower than the 1.5% growth the Bank of Canada published last week, and represents yet another decline in GDP per capita—the 8th quarterly drop in the last 9 quarters.

There were some temporary factors—the rail strikes in August pulled down transportation and related activity. But the trend points to a slow moving economy that is performing well below its potential.

We don’t get provincial data, but the industry breakdowns provide clues. Canadian oil and gas sector GDP is up 4.1% year-to-date (oil sands—all Alberta—is up 4.8%). The gain reflects rising oil production with TMX coming online earlier this year, and supports our forecast for Alberta’s GDP growth to outpace the rest of the country this year.

Implications: This report paints a weak Canadian growth picture, reinforcing further rate cuts by the Bank of Canada. We see the policy rate falling another percentage point by mid 2025. A 50-basis point cut in December cannot be ruled out if we get soft jobs and CPI data this month.

New Project  - A data centre in Calgary

Artificial Intelligence (AI) needs data, and data needs power. With that in mind, Montreal-based eStruxture has announced that it will be building a $700 million data centre in Calgary, with planned operations starting in 2026.

According to the Canadian Energy Regulator, there are 239 data centers in Canada, including 9 in Edmonton, 12 in Calgary, and 1 in Lethbridge.

Pendulum swing - New federal targets will dramatically slow population growth

We’ve now had more than a day to think about it.

Last week, we reported our first thoughts on the new measures announced last Thursday. It’s a big move. If fully implemented, it will slow Canada’s population growth to near zero.

In Alberta, the impact will also be dramatic, though we maintain that three forces will keep the province’s population growing much faster: 1) steady streams of interprovincial migrants; 2) continued natural increases (only 4 provinces are growing naturally, with Alberta posting the largest gains); and 3) a smaller pullback in non-permanent residents (NPRs).

Our current modelling suggests that population growth could slow to around 2% next year, and 1.6% in 2026. That assumes moderating, but still strong, inflows of interprovincial migrants, slower growth in permanent residents based on the new targets, and net change in NPRs falling to zero to keep Alberta at the 5% national target.

Population is a key economic variable, but increasingly hard to forecast. We’ve been surprised by the resiliency of the Alberta population numbers and an open question is whether the federal policy will reduce NPRs as quickly as they are targeting (see our discussion on higher Bank of Canada vs. lower federal projection differences). We receive third quarter population estimates next month, which will provide us with more clarity.

Implications: Our overall forecast for consumer spending is tepid, reflecting the broad-based pressures of past rate hikes and elevated prices. Rate cuts will help turn that ship around, but it will take time. That’s the broad storyline. Underneath the surface, there’s a lot of variation. We see Alberta’s unique demographics—a much higher proportion of young households (who on average carry more debt)—as one likely reason retail sales have struggled to gain much traction this year despite nation-leading population growth.

Looking South - All eyes on U.S. election next week

Canadians are on high alert for next week’s U.S. election results and for good reason.

Three-quarters of the goods Canada exports flow south of the border. In Alberta, that share is almost 90%, amounting to $162 billion last year. Alberta imports from the U.S. were $26 billion. See the Charts of the Week for more on Canada’s trade with the U.S.

North American supply chains are deeply integrated. Oil from Alberta is sent to U.S. refineries, where gasoline and diesel are produced for final consumption. Auto parts move back and forth across the border before final assembly takes place. In a recent report by the Canadian Chamber of Commerce, authored by University of Calgary professor Trevor Tombe, about half of all two-way goods trade between the two nations involves subsidiaries or ‘related parties’.

Trade in services is also important. For example, last year $12.9 billion was spent by Americans visiting Canada, about half of all of foreign visitor spending.

Both major U.S. parties have a protectionist slant, though only former President Trump is threatening to apply broad tariffs of at least 10% on imports from all countries (and even higher tariffs on China). The Harris campaign is not proposing the same broad-based tariffs, but also has an America-first plan. It is also noteworthy that then-Senator Harris voted against the USMCA on environmental grounds and has committed to reviewing the trade deal during her term. President Biden kept Trump’s tariffs on China, and more recently, increased tariffs on EVs.

Sorting all this out is a complicated task with puts and takes all over the place. Oxford Economics has attempted to model the platforms (as written) on the global, U.S. and Canadian economies. Key results include:

• A Harris presidency would not materially alter the economic outlook from the base case, as for the most part they assume continuation of existing policies. Oxford estimates that Canadian GDP rises slightly in the next two years above its base case, and is 0.1% higher than the baseline by 2029.   
• A Trump presidency results in higher inflation and slower growth in Canada, largely based on the assumption that broad based tariffs are fully implemented and that retaliatory tariffs would be imposed. This offsets much of the demand boost from tax cuts. Oxford does not see a material impact in 2025 and 2026, but estimates Canada’s real GDP is 0.9% lower than the baseline by 2029.  

Oxford’s analysis is comprehensive, but as always a few caveats are in order. First, it’s highly unlikely the platforms will be implemented exactly as written. For example, would Trump apply tariffs across the board, or on select items like he did in 2018 with steel and aluminium? Second, details on both candidates' plans are missing, making it hard to model all the nuances. For example, how much would Trump retain from the Inflation Reduction Act (IRA), which includes a host of subsidies for clean tech? Third, how will other countries react to these policies?

In another analysis of tariffs, the Canadian Chamber of Commerce report estimates that, in the long-run, a 10% tariff on U.S. imports could reduce real income by 0.9% in Canada. Modelling by the Peterson Institute shows smaller impacts of a Trump presidency on Canada’s real GDP than Oxford, with negative tariff impacts offset by other measures like fiscal stimulus.

For Alberta, a key question is whether Trump tariffs would apply to Canadian oil and gas (the vast majority of the province’s exports—see the Charts of Week). Some industry experts see this as unlikely, noting it was not a feature of previous tariffs and the cost would be borne, in large part, by U.S. refineries and consumers (undermining Trump’s plan to lower energy costs). If imposed, and retaliatory measures are taken, Oxford modelling suggests a relatively large impact on industry costs due to high shares of intermediate inputs that cross borders.

In summary, there is a ton of uncertainty. We see our October Outlook as a reasonable base case view, with a low scenario capturing the effects of an escalation in geopolitical tensions. Our next outlook comes out in December, and we’ll have a new U.S. President-elect, new data, and the impact of recent federal population measures fully incorporated.

Stay tuned. Once the election results are in, we’ll be providing more updates.

Interesting Fact…Alberta’s Industrial Heartland turns 25

In last week’s Seven, I featured Nanostics, an Edmonton-based health sciences start-up. This was based on my discussion with Catalina Vasquez, COO and co-founder of Nanostics, at the 2024 State of the Region panel hosted by the Edmonton Metropolitan Region Board.

This week I’m profiling Alberta’s Industrial Heartland Association based on my conversation with Mark Plamandon, Executive Director of the Association.

Alberta’s Industrial Heartland is Canada’s largest hydrocarbon processing region with $40 billion in existing capital investments. Composed of partners from five municipalities, it is celebrating its 25th anniversary this year.

The region turns hydrocarbons into fuel, fertiliser, power, petrochemicals, and hydrogen.  It is attracting low to net zero emissions investments, including the largest capital project in the province—Dow’s Path2Zero petrochemical expansions (the first net zero facility of its kind in the world). Other major projects underway include Air Products Hydrogen facility and Imperial Oil’s biodiesel plant.

Next week’s profile: NAIT.

Charts of the Week: Alberta’s exports to the U.S.

Alberta is a trading province, and the vast majority (about 90%) of Alberta’s merchandise exports flow to the U.S.

What does Alberta export to the U.S.?

The oil and natural gas industry (including refined products such as gasoline) accounted for the largest slice (82%) of Alberta’s $162 billion in total goods sales to the U.S. last year. For Canada, that share is 28%—highest among all industry categories.

The next largest export categories for both Alberta and Canada were agriculture and food, and chemicals.

Where do Alberta’s U.S. exports go?

Illinois is by far Alberta’s largest U.S. export market at $65 billion in sales last year. In comparison, shipments to China—Alberta’s second largest (country) export market—were $5.5 billion. Illinois is home to major refinery centres in the U.S. Midwest, where most of Alberta’s oil is shipped primarily via the Enbridge Mainline System.

Rounding out the top five are Washington ($13.2 billion), Texas ($12.8 billion), Minnesota ($10.6 billion), and Oklahoma ($9.1 billion).

Excluding exports from the oil and gas and petroleum refinery industries, Texas is the number one state for Alberta’s exports followed by California.

Answer to the previous trivia question: John Adams was the first Vice-President of the United States.

Today’s trivia question: What was the voter turnout (as a % of citizens 18 years and older) in the 2020 U.S. presidential election?