In this week’s The Seven…

• Off target: U.S. inflation ticks up
• Next week: Canadian inflation
• Factory fall off: Manufacturing revenue down again
• Interesting Fact: Canadian crude sets record
• Chart of the Week: Alberta’s agri-food exports to the U.S.

“Election, you say? What election?”

At ATB Economics, we try hard to “stick to our lane” of economic analysis and avoid talking about partisan politics. With that said, it would be silly to pretend there wasn’t a major and deeply partisan event last week that has significant ripple effects for the Canadian economy. We commented in last week’s Seven on some of the economic stories to watch now that we know who the next president of the U.S. will be. We also discussed why proposed tariffs on imports into the U.S. may exempt Canadian energy in Tuesday’s Twenty-Four. There will be a lot more to digest in the weeks and months ahead and we will be incorporating this into our economic commentary and forecasts as we learn more about what’s next. In the meantime, inflation is on our minds with U.S. data out earlier this week and Canadian numbers coming out on Tuesday.

Off target: U.S. inflation rate rose in October

On Wednesday, the U.S. Bureau of Labour Statistics released inflation data for October that pegged the headline inflation rate in the U.S. at 2.6%, up from 2.4% in September and the first year-over-year acceleration since March. Despite signs of a softening U.S. labour market, the inflation rate is still above the 2% target and President-elect Trump’s proposed tariffs (if implemented) and a large government budget deficit will put upward pressure on prices over time.

The gist: The inflation rate in the U.S. might seem like their problem, but Canada’s economy is heavily influenced by what happens south of the border so it also matters to us. In terms of the consumer goods and services Canadians purchase from the U.S., a 2.6% inflation rate is relatively manageable.

More pertinent at the moment, the new U.S. inflation numbers—despite the uptick in the headline rate—are probably not enough on their own to prevent an interest cut by the Federal Reserve in December. This matters because divergence* between interest rates in the two countries affects, among other things, the exchange rate. In this case, higher interest rates in the U.S. put downward pressure on the loonie.

There are economic pros and cons to a lower loonie, but the Bank of Canada will not want to see it fall too far. As such, less divergence between the two country’s interest rates will provide more room for the Bank of Canada to continue cutting. Our current guidance sees the policy rate in Canada falling to 2.5% by the middle of next year. While we also expect the Fed to make more cuts (assuming inflation does not rise precipitously), the gap between the two rates is likely to get larger rather than smaller. As Fed Chair Powell said yesterday, “the economy is not sending any signals that we need to be in a hurry to lower rates.”

*The Federal Reserve lowered the U.S. benchmark interest rate on November 7 by a quarter percentage point to a range between 4.5% and 4.75%. Canada’s benchmark rate currently sits at 3.75%.

Next week: Inflation in Canada

Overall economic performance is one of the key reasons for the divergence in interest rate policy in the U.S. and Canada (the Canadian economy is also more sensitive to interest rates with higher borrowing costs hitting growth harder than in the U.S). Tepid GDP growth in Canada is helping to keep inflation in check and making the case for lower interest rates and the economic boost that would provide. The reverse is true in the U.S. where a resilient economy is making it more difficult to deal with inflation and reducing the need for lower interest rates. Canada will be lucky to get out of 2024 with economic growth of a little over 1% while the U.S. is on track to grow by 2.6% or more.

In both cases, especially given the “data-dependent” stance of the Bank of Canada and the Fed, the inflation rate matters. Even if inflation went up in October (we suspect that year-over-year changes in energy prices may cause it to do so), Tuesday’s report from Statistics Canada is likely to reinforce the “inflation is under control” narrative and keep the Bank on track for another interest rate cut on December 11. What the Bank decides to do will also depend on the GDP reading for October that comes out at the end of this month and the results of the Labour Force Survey scheduled for release on December 6. Our call remains a cut of at least 25-basis points in December.

Manufacturing sales slipped in September

Speaking of Canada’s tepid economic performance this year, manufacturing sector data released this morning show that national sales decreased 0.5% in September—the second monthly pullback in a row. Sales were also down on a quarterly basis by 1.3%—the fourth decline in a row. It’s a similar story for Alberta, with monthly sales down by 0.9% and quarterly sales off by 1.9%. 

Chart of the Week: Alberta’s agri-food exports to the U.S.

On Tuesday, we discussed the importance of Alberta’s oil and natural gas exports to the U.S. in light of potential tariffs. Although oil and natural gas (including refined petroleum products like gasoline) account for the majority of Alberta’s merchandise exports to the U.S. (81.5% in 2023), they are not the only products we ship south of the border. Food is second on the list at 5.6% last year (just slightly ahead of chemicals). That works out to about $8.8 billion in export revenue.

As we can see from our Chart of the Week below, cattle and meat products accounted for a little over half of Alberta’s agri-food exports to the U.S. last year. Wheat, canola, barley and products made from them such as flour, canola oil and malt are the second largest category at 34% of the total. Frozen food (including a lot of frozen potato products) rounds out the top three at 8%.

The U.S. is not Alberta’s only customer for its agri-food products, but it did account for 49% of sales last year (compared to 99% for oil and gas). As a result, if the U.S. imposes new tariffs on Canadian agri-food products, this would be a significant setback for the industry.

Answer to the previous trivia question: Alberta's official colours are blue and gold.

Today’s trivia question: What is Alberta’s official stone?