In this week’s The Seven…

• Jumbo Wednesday? Door open for a larger Bank of Canada cut next week
• Give me more time - Consumers still cautious despite inflation progress
• Break the glass - Canada’s Productivity Summit
• Subdued and stable - Business conditions in Canada
• Interesting Fact: Nobel Prize winners in economics - Why are some countries richer than others?
• Chart of the Week: Average home prices in Alberta communities

Room for 50

And I'm free, I'm free fallin' 

—Tom Petty

The Bank of Canada was late out of the gate when inflation took off and now they risk being behind the curve as inflation falls. After one of the most aggressive and prolonged rate hiking campaigns since the early 1990s, we see the door open for the Bank of Canada to move more quickly on the way down. The economy has softened, with excess supply building, and inflation is falling. Even as rates fall, policy will be restrictive as people renew loans at higher rates and the policy rate settles higher than it was before the rate hiking started.

We look for a 50-basis point cut next week, followed by 25 in December. If the Bank elects for 25 next week, we would consider it a cautious approach. The Bank could point to last week’s stronger-than-expected job numbers and sticky wage growth. Yet we feel the sub 2% inflation reading and the soft economic backdrop supports a larger move. Regardless of 50 or 25 next week, our forecast has the Bank cutting to 2.75% by mid next year (the midpoint of the Bank’s neutral range 2.25-3.25%).

A few reasons for our 50 in October view:

• The headline inflation rate was at just 1.6% last month (below target). We see shelter costs rising at a slower year-over-year (y/y) pace and providing downward pressure. Inflation excluding mortgage interest costs (MIC) was only 1% last month, and MIC will continue to subtract from inflation as the Bank cuts.
• Core inflation metrics are trending lower (last month, core and trim growth eased on a three-month basis, even though the y/y readings held steady).
• There is slack in the labour market, with the economy in excess supply and declines in per capita GDP.
• The U.S., with a much hotter economy, has made a 50-basis point cut, with smaller decreases likely to come. Different economies and inflation situations justify rate divergence—Canada can move faster.

Inflation is down, but consumers aren’t celebrating yet

This week we learned that consumer price inflation has fallen below the Bank of Canada’s target of 2% for the first time since February 2021.

That’s good news for those looking for lower borrowing costs, and we believe this will eventually translate into improved sentiment and consumer spending next year.

Canada’s Productivity Summit - Break the glass

On a list of economic worries in Canada, cost of living, job security and wages would be near the top of many people’s list. But what about productivity?

While not as relatable to most, it turns out to be very important for economic prosperity.  The short version is that productivity (output per hour worked) is the main way to sustain increases in living standards. Higher employment rates and hours worked can also help, but there are limits to that (people can only work so much and population aging leaves proportionately fewer workers available).

The importance of productivity makes Canada’s performance all the more worrisome. Canada’s labour productivity has been on a steady decline the last two years and the gap between Canada and the U.S. and other advanced economies has widened. It’s been referred to as an “emergency” by the Bank of Canada’s Deputy Governor Carolyn Rogers, requiring a “break the glass” response.

With that context in mind, a summit to address this problem was in order. And that’s exactly what the University of Calgary’s School of Public Policy (SPP) hosted on October 16 and 17 at the BMO Centre in Calgary. Dubbed Canada’s Productivity Summit, the event brought together business and community leaders, economists, policymakers, and scholars from across the country.

The SPP will release future summaries, but here are some of the things I heard as potential problems: Low business investment, lack of scaling of companies and commercialization in Canada, regulatory delays and uncertainty, insufficient transportation infrastructure, internal trade barriers, and skills mismatches in the labour force (training, immigration).

I participated on two panels: one on macroeconomic policy with former Deputy Governor of the Bank of Canada Lawrence Schembri and Robert Asselin, SVP, Policy - Business Council of Canada. I also gave an opening presentation for the panel on the resource sector, where I shared findings from my latest paper on the issue.

It was a great conference overall. Kudos for the SPP for putting it on, with leadership from Professor Trevor Tombe and SPP Director Martha Hall Findlay. More to come.

Subdued and stable - Business conditions in Canada

How are firms feeling about business conditions in Canada? “Subdued and stable,” according to the Bank of Canada’s third quarter Business Outlook Survey.* Reasons cited for these feelings include higher interest rates, soft demand, uncertainty, and taxes and regulation. As of the third quarter, the Business Outlook Survey indicator—a summary measure of questions in the survey—remained lower than normal, with only modest improvement.

We didn’t get updated survey results on the top risks. But the second quarter results suggest that businesses are much more concerned about geopolitical and policy risks, and less concerned about supply chain issues and inflation, than the year prior.

We also don’t have an Alberta breakdown in this survey, but we’re seeing weakness on the consumer side—so firms in retail and consumer-facing industries are likely facing pressures. On the other hand, some areas are performing relatively well like oil production, home construction, petrochemicals, food manufacturing, and tech. 

*The Business Outlook Survey was conducted from August 8 to 30, 2024. The survey is based on interviews with the senior management of about 100 firms selected to reflect the composition of the gross domestic product of Canada’s business sector.

Interesting Fact...Nobel Prize awarded for understanding differences in prosperity across nations

Why are some nations richer than others? The 2024 Nobel Prize in Economics was  awarded this week to three US-based economists for helping answer this question: Daron Acemoglu (Massachusetts Institute of Technology), Simon Johnson (Massachusetts Institute of Technology) and James Robinson (University of Chicago).

In particular, they find an important role for democratic institutions in explaining why some countries have grown faster. Countries with ‘extractive’ institutions aimed at exploiting resources since colonialism have fared relatively poorly, whereas countries with ‘inclusive institutions’ have become more prosperous. The authors examined the advantages of democracy and the rule of law, and why they are strong in some countries and not others.

To learn more, I highly recommend the book Why Nations Fail by Nobel winners Acemoglu and Robinson.

Chart of the Week: Calgary leads in Alberta home price growth

We know that people have been moving to Alberta, in part to take advantage of relatively affordable housing. Net interprovincial migration into Alberta has been persistently strong, especially from higher-priced housing markets like B.C. and Ontario. Our view for some time has been that people will also chase affordability inside Alberta.

On that point, our Chart of the Week shows average residential resale prices* by region in the province over the last four years in September. Calgary has seen particularly large increases, driven by a booming population, and has increased its price lead over other parts of the province.

But, more recently, we’ve witnessed strength in other markets, with notable gains in Edmonton as of late. Meanwhile Calgary sales have slowed, and growth in benchmark prices has moderated. Calgary, along with NE Alberta, are the only regions (out of 11) tracked by CREA with a sales-to-new listings ratio below 0.6 (an indication of a seller’s market) as of September.

*Ideally, we’d have benchmark prices, which control for home characteristics, but that’s only available in Alberta for Calgary and Edmonton.

Answer to the previous trivia question: According to Popular Science, a “2-by-4” is not 2 inches by 4 inches but—after losing approximately a quarter-inch on all sides due to planing and drying—1.5 inches by 3.5 inches (which just doesn’t roll off the tongue very well).

Today’s trivia question: When was Major League Baseball’s World Series played outside the United States for the first time?