In this week’s The Seven…

• The fourth cut is the deepest - BofC goes supersized
• Immigration turn - Federal government cuts target
• Wait and see - Consumers need more time
• What’s your forecast? For oil demand
• Success Story: Edmonton-based Nanostics 
• Interesting Fact: Misunderstood terms in economics
• Chart of the Week: Edmonton region - Population liftoff

Rate cuts turn 50

The big news this week is that the Bank of Canada chopped 50 basis points from its policy interest rate in a ‘Jumbo Wednesday’. We made this 50 call in our October forecast, and locked it in after the inflation report was released last week.

I explored the decision in detail on Wednesday, but I’ll just make this point: the Bank is clear we’ve reached a new chapter in the battle against inflation. It’s now confident about inflation and much more concerned about growth. The goal now is to ‘stick the landing’ so that growth does not slow too much.

If you didn’t have time to read the 57-page Monetary Policy Report (MPR) or watch the press conference, I suggest reading this paragraph:

“In the past few months, inflation has come down significantly from 2.7% in June to 1.6% in September. Recent indicators suggest it will be around 2% in October. Price pressures are no longer broad-based, and both our measures of core inflation are now under 2.5%. Our surveys also find that business and consumer expectations of inflation have shifted down and are nearing normal. All this suggests we are back to low inflation. This is good news for Canadians” (emphasis added).

This has a tone of “we’ve won the inflation battle.” The “good news” is a new addition. The Bank wouldn’t be saying such things in prepared remarks without a lot of confidence that inflation won’t rear its ugly head again any time soon.

Will the Bank make more cuts? Of course they will—as long as inflation cooperates. Governor Tiff Macklem was clear on that. We expect them to move quickly to the neutral rate (estimated by the Bank to be 2.25-3.25%) by mid 2025. For now, we’re in the 25-basis point cut camp for December, but we’re on the fence and we’d easily change our call to 50 in December if we get soft CPI and job reports.

Another cut this week…This time to federal immigration targets

Yesterday, the federal government announced a sharp 21% reduction in its target for permanent residents next year, from 500,000 to 395,000. This is on top of previous plans to reduce the share of non-permanent residents (NPR) from 7.3% of the population to 5% over three years.

This is a big move. We had accounted for the NPR pullback when it was announced, but this latest development has new forecast implications.

Our initial analysis suggests that this change, if implemented, could push Alberta’s population growth down to around 2% next year compared to 2.8% in our October forecast.

An open question is whether these measures will actually reduce population by the targeted amounts. Previous Statistics Canada projections have not jived with the Bank of Canada’s much higher forecasts, with the Bank assuming it will take longer for the federal NPR targets to be reached (Statistics Canada’s forecast for Alberta was 1.7% (M2 scenario) in 2025). Our view is more aligned with the Bank on this.

We maintain that Alberta will be less impacted on the NPR front, as new international student caps are allocated on a per capita basis. Alberta is well below the national per capita average for international students, and already near the 5% NPR target. Alberta is also expected to experience interprovincial inflows and larger natural increases than other provinces.

The impact of this change is complex and comes with competing economic effects. Our initial reaction is that it will have the following implications for our forecast:  

• Less pressure on housing. The construction industry is still in catch-up mode, so we see construction activity staying strong in Alberta. But the slower pace of immigration will take some pressure off demand, rents and prices, and will ultimately reduce long-term housing requirements relative to the previous targets.
  
  
• Drag on overall consumer demand. Fewer people arriving means less spending. That said, the Canadian economy has not grown fast enough to absorb new entrants into the labour market and output has not kept pace. The change could speed up the recovery in per capita spending in Alberta and across Canada. 
  
  
• Mixed effects on the labour market. The Canadian and Alberta labour markets are churning out jobs, just not at the pace at which people are arriving and entering the labour force. Higher unemployment rates have been observed among youth and newcomers in particular. The slowdown in labour force entry should put downward pressure on unemployment rates, even as the population slowdown shaves demand (and associated employment). But it may also make it harder for sectors facing hiring challenges to find workers in areas like construction, hospitality and healthcare. The Canadian Chamber of Commerce stressed the challenge these large changes pose to workforce planning.

This is just guidance for now, as we incorporate this (and every other change happening in the economy) into our forthcoming December forecast.

Demand (forecast) divergence

How much will oil demand increase next year? Depends who you ask.  

On October 14, OPEC revised down its world oil demand forecast for 2024. It now expects global oil demand to grow by 1.93 million barrels per day (b/d) (a 1.9% increase) and by 1.64 million b/d day in 2025.

But that’s still higher than the latest International Energy Agency outlook, which sees global oil demand rising by 0.86 million b/d in 2024 and 1.0 million b/d in 2025.

Coming up the middle is the U.S. Energy Information, which is expecting demand to grow by 0.92 million b/d this year and 1.29 million b/d next year.

Oil demand is notoriously hard to forecast, and the variation underscores the uncertainty.  But to some observers, the variation is more than normal—the DOB notes that the difference between the IEA’s forecast for 2024 and OPEC’s equates to 1% of global oil demand.

Why does this matter? Keep in mind that the next meeting of OPEC decision-makers is scheduled for December 1. If oil demand falls well below OPEC forecasts, it could result in downward pressure on prices and lead to longer delays in bringing back the production the cartel has been holding in check. But, with reports that Saudi Arabia may no longer be interested in supporting its unofficial $100 per barrel price target, it’s unclear how long OPEC will be willing to give up market share.

Our latest forecast sees WTI averaging US$76 per barrel this year and US$74 next year, supported by continued increases in oil demand and a gradual return of curtailed OPEC production.

Consumer spending - A convincing comeback will need to wait

It’s hard to get a handle on the retail numbers released this morning.

In Alberta, retail sales fell 1.1% in August, but that was after a 2% surge in July (seasonally adjusted). We didn’t overreact to the increase in July, and we’re not reading too much into the August drop either.

Let's instead focus on the trend. And the trend is, well, meh for both Canada-wide and Alberta sales. Alberta retail sales have failed to gain much ground in the last year and are still holding below the January 2023 spike. The latest ATB Mastercard data point to a jump in September, but that won’t be enough to convince us that the consumer is coming back.

Consumers are clearly fatigued from past high inflation and rate hikes, and we see this continuing for the rest of the year. An improvement is forecast in 2025 as rate cuts kick in with a lag.

This is all baked into our October forecast, where we had only a 0.7% increase in retail sales this year (tracking close to the year-to-date figure) and a  per capita decline in consumer spending. The weakness on the consumer side is being offset in other areas of the economy, namely exports and residential construction.

More on the retail report next week.