In this week’s The Seven…

• The waiting game - Consumers returning, but slowly
• How does it feel? Why households are not yet celebrating lower inflation
• On target - BofC will keep cutting, but may shy from another jumbo move
• They’re coming to Alberta: Notes on the tourism sector
• Interesting Fact: Airdrie: From village to city
• Chart of the Week: Tourism spending in Alberta

Inflation in Canada may be (finally) under control, but the cost of living remains an ongoing concern. Today’s retail spending report confirms that, while households have increased their spending in the second half of the year, they are retaining a cautious ‘wait and see’ stance.

If inflation has fallen, why aren’t people celebrating in the streets and turning on the spending taps? We dig into this below.

Looking for a footing: Consumer spending

Today’s retail numbers for September point to a cautious consumer, despite some tentative signs of improvement. Driven entirely by higher volumes, retail sales ticked up for the third straight month in September on the back of higher auto and general merchandise sales. On a year-to-date (YTD) basis, though, they rose only 0.8% from last year’s level.

It was a similar trend in Alberta where, despite a notable uptick in the third quarter, YTD sales held relatively close to last year’s level.

Holiday spending is shaping up better than in 2023. But keep in mind that this time last year inflation was still running hot (>3%) and the Bank of Canada’s trendsetting interest rate was at its peak (5%). In short, not a great environment for retailers. The Retail Council of Canada’s annual survey shows that Canadian households plan to spend 8% more than last holiday season, but they’ll go about their spending “mindfully” with a focus on fewer gifts and deal hunting. The PwC holiday spending survey also points to an increase over last year, with residents of Manitoba and Saskatchewan planning to spend the most.

This week the federal government announced a two-month GST holiday on some goods and services and $250 cheques for Canadians who worked in 2023 and earned $150,000 or less. While this may encourage some additional spending on the margin, we don’t see it fundamentally shifting the spending outlook, nor does it address deeper issues (like sagging productivity and housing affordability). The Bank of Canada will see through the transitory changes in inflation that result from the measure.

Waiting for that low inflation feeling

Canada’s inflation rate in October was right on the 2% target. But talking about this in presentations, we sometimes get blank stares. It’s not that people don’t believe inflation is 2%—it’s that it doesn’t necessarily feel that way.

This makes sense. An individual's experience is more likely that costs are much higher than they were, not that they are rising at a slower rate. It also may help explain why people's perceptions of current inflation are so much higher than the actual readings.

The following chart makes the point. If inflation followed a 2% trend starting in January 2021, consumer prices would have been up by 8% today. Instead, prices are 18% higher in Canada. This is what people are feeling.

Back to Alberta - Tourism notes

On Tuesday, Rob was on a panel at the Tourism Industry Association of Alberta’s Economic Forum and Premier’s Dinner in Edmonton. With the potential effects of the incoming Trump Administration a key topic of the discussion, there just wasn’t enough time to cover everything Rob wanted to say about tourism and its role in the Alberta economy, so here are a few items from his notes:

• Whenever someone asks for an example of a growth area or a source of diversification for the Alberta economy, I can say with confidence that tourism fits the bill.
• Tourism is also what I call a “tipping point” industry because it can be the difference between a business struggling and thriving. Take a hypothetical restaurant in downtown Edmonton: it might do okay serving local customers, but business travellers and people coming to town for the Fringe Festival or any number of other reasons, mean it’s packed all the time.
• This also works in reverse: Alberta’s vibrant economy means there are local amenities like good restaurants, excellent infrastructure and conference facilities available to locals and visitors alike. This is one of the reasons Alberta’s tourism sector is well-positioned to continue growing.
• There are two important caveats to this: 1) While Alberta has a lot of advantages when it comes to growing its tourism sector (incredible landscapes, great cities, a diverse population, extensive transportation systems and linkages, myriad arts, culture and recreation assets and events, world-class universities, and business connections across Canada and around the world) it faces intense competition from other jurisdictions trying to do the exact same thing. 2) At about 2% of Alberta’s GDP,* tourism can continue to contribute to the diversification of Alberta’s economy, but it can only carry so much of the load.
• Like virtually all sectors, tourism needs to figure out how to stay in front of advancements in technology. It also faces challenges finding enough workers both now and in the future.

*The data on tourism’s share of GDP from Statistics Canada’s Tourism Satellite Account are woefully out of date with 2019 being the most recent year available, but they are the only accurate estimate of the sector’s contribution to GDP. The calculation includes tourism activities related to transportation, accommodation, food and beverage services, recreation and entertainment, other products and services.

Interesting Fact…Airdrie: From village to city

On Wednesday, Rob presented at the 2024 Airdrie Business Breakfast and Economic Outlook. Given that a rising population is one of the key drivers of overall economic growth in the province, he noted the amazing transformation of Airdrie from a village of under 1,000 residents in 1970 to a city with a population of over 90,000 today. According to the latest population projections from the Government of Alberta, the city is on track to exceed 100,000 in 2027 and to continue to add residents out to at least 2051 when the projection period ends.

Chart of the Week: Tourism spending in Alberta

According to Travel Alberta, visitors to the province from elsewhere in Canada or other countries spent $5.9 billion in Alberta in 2023. Albertans travelling within the province spent an additional $6.8 billion. The combined total of $12.7 billion in spending set a new record and represents a 19% increase compared to 2022—a dramatic turnaround from the COVID lows

Answer to the previous trivia question: A consignment store sells products other people own.

Today’s trivia question: What does the acronym MSRP typically stand for in a retail context?