In this week’s The Seven…

• Summer cooldown - Another soft Canadian jobs report
• Trying to keep up - Alberta adds job, but even more search for work
• Changing fears - From inflation to growth
• Life goes on - When the inflation dust settles 
• Trade threat - China launches anti-dumping probe on Canadian canola
• Wild ride - Crude oil prices
• Interesting Fact: Energized B.C. exports
• Chart of the Week: Deconstructing Canada’s merchandise trade surplus

The Bank of Canada kicked off the school year with a carryover of its July dovish tone (but didn’t say a lot). In summary, the Bank is now less worried about high inflation, and more concerned about growth.

What does the economy look like now that rates are falling? We take a look.

The week ended with a soft employment report—jobs higher, but entry into the labour force even stronger pushing up the unemployment rate in Canada (including in Alberta). Yet another reason for the Bank to keep cutting.

Ex-poste: Soft jobs report reinforces rate cut decision

It was bound to happen. Coming off two months of flat job readings, the unemployment rate was primed to move higher. With population growth brisk and more people entering the labour force in search of work, jobs need to rise at a decent clip just to keep the unemployment rate flat.

Last month, Canada added 22,000 jobs. But even more people entered the labour force looking for work, pushing the unemployment rate up 0.2 percentage points to 6.6%—the highest since September 2021. There’s been a particularly large increase over the past year in unemployment among youth and newcomers to Canada, as the Bank of Canada highlighted this week.

Statistics Canada notes a tougher summer job market for students, and that fewer unemployed transitioned to employment last month—an indication of increased difficulties finding work.

The longer term trend points to slowing employment growth. Over the past year, employment has risen by 1.6% led by gains in the public sector and in part-time positions.

On the wage front, there are some signs of easing. Average hourly wages rose a still-elevated 5.0% y/y, but that’s down from the previous two months. The Bank of Canada said this week that wages have proven stubborn, which combined with weak productivity, poses an inflation problem. But the Bank also said a softer labour market should put downward pressure on wages, and we’re starting to see some early signs of that.

Bottom line: This report reinforces the Bank’s decision to cut this week. It’s clear that Canada’s economy is struggling to grow fast enough to absorb new entrants into the labour force. Keep a close eye on next month's jobs report—the last one before the next rate decision. If there is a sharp deterioration, a 50-point cut could be on the table. For now, we’ve retained our call for two more 25-basis points cuts this year.

Alberta - Employment rising, but not as fast as the population

The challenge of adding enough jobs for new labour force entrants is even more acute in Alberta. The province’s population is growing more than a full percentage point faster than national trends, lifted by net interprovincial gains.

Alberta added 12,800 jobs last month—the largest increase since February. The details show they were concentrated in the service sector (led by retail/wholesale trade and finance/real estate) and entirely in part-time jobs.

But with the participation rate rising and robust population growth, the unemployment rate rose by 0.6 points to 7.7%—the highest since October 2021.

The annual pace of job growth has slowed to 2% year-over-year (y/y). Year-to-date, employment has grown by 3% (or 75,000), with gains concentrated in full-time and private sector jobs.

Bottom line: Employment improved last month, but strong labour force entry is putting strong upward pressure on the unemployment rate. With today’s report we’re now tracking 2.9-3% employment growth and a 7-7.2% average unemployment rate for 2024. Our next forecast comes out later this month.

The summer of dovish feelings and rate cuts

What a difference a summer can make. Three rate cuts in the bag in just three months… and the Bank of Canada is just getting going. It’s too soon to declare inflation victory, but the road back home to the 2% inflation target appears to be getting shorter.

The Bank of Canada did exactly what everyone (including us) was expecting this week—cut the policy rate from 4.5% to 4.25%. Some noise was made about a possible 50-point cut—that wasn’t our forecast. Sure, economic conditions have weakened and inflation has cooperated, but not enough to warrant 50 basis points—at least not yet.

Those returning from vacation may have missed the summer dovish pivot by the Bank. In the spring, the Bank said they liked what they were seeing on inflation, but wanted to see more. The Bank indeed saw more, enough to start cutting. Then this summer, the Bank said it was becoming confident and is now more concerned about downside risks—something reiterated on Wednesday.

Nothing in life is certain, but the downward trend in inflation is compelling. The main problem area—shelter—is now rising at a slower rate and the share of CPI components rising more than 3% is close to normal (i.e. disinflation is broadening).

The statement and press conference opening remarks on Wednesday were short, leaving us to scramble for any clues as to what’s next. I was wondering if Tiff Macklem would repeat his concern about the risk of inflation falling too fast. He did, but even stronger in my view by adding the word “increasingly”:

“As outlined in our July forecast, inflation is expected to ease further in the months ahead. It may bump up later in the year as base-year effects unwind, and there is a risk that the upward forces on inflation could be stronger than expected. At the same time, with inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much” (emphasis added).

For now, the Bank is leaving the champagne on ice—inflation is still not at its 2% target. But with a weaker economic backdrop, we believe inflation is well on that path.

The Bank is looking for where the puck is going, not where it’s been, and it will cut if inflation continues down its current downward path. From the press conference: “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate.”

Sure, there’s a risk the Bank moves slower if inflation proves sticky (think potential tariffs, stubborn wage pressures), but there’s also a chance that it will cut more aggressively (including possible 50-basis point cuts) if economic conditions deteriorate further.

The U.S. Federal Reserve is expected to join the rate-cutting party later this month. The U.S. jobs report for August, also released today, was slightly weaker than expected (up 142K), but the unemployment rate dipped to 4.2%.

What does life look like after the cut?

If all goes as planned, the Bank—by its own July forecast—will be at target inflation by the end of next year. Our forecast ends with the policy rate at 2.75% next year—the midpoint of the Bank’s estimated 2.25 to 3.25% neutral range.

If that story unfolds, what does it mean? Here are a few things that come to mind:

Lower, but still higher than before. First, the policy rate is expected to be higher than it was before the rate hikes. If we’re right, about 2.5 percentage points higher. So better, but not quite the low borrowing costs that had become the norm before the inflation spike.

The key point for the Bank of Canada is that they can lower rates without worrying about policy becoming too stimulative again. About half of mortgages have yet to face rate increases, but they will as they come due.

More relief for variable-rate borrowers. Variable-rate loan rates will continue to decline, alongside the policy (overnight) rate. But fixed rates, say 3 to 5 years, have already come down as the bond markets have priced in future rate cuts. So don’t expect as much movement there.

The consumer will remain cautious, but gradually loosen the purse strings. Consumers have pulled back in response after 2+ years of high inflation and rate hikes. Per capita spending has declined in Alberta and across Canada. Lower rates, and more importantly, the confidence that the inflation problem is being wrestled to the ground, will provide a lift to spending in late 2024 and in 2025. But the wave of mortgage renewals at higher rates over the next two years will keep many consumers cautious.

Demographics will continue to drive Alberta’s real estate market. Alberta has bucked the slowing trend in housing, in large part driven by inflows of interprovincial migrants. We now see signs that Edmonton has caught Calgary’s real estate fever, with sales and prices in that market picking up. We see the chasing affordability theme that played out across Canada now taking shape inside Alberta as home buyers are drawn to less expensive markets.

Challenges remain after the cuts. Monetary policy is a blunt instrument—it cannot solve all of Canada’s economic problems. Some of them pre-date the inflation spike. Improving Canada’s productivity performance, as we’ve discussed in detail, should be at the top of the list. It is a standard of living booster and inflation fighter. Who wouldn’t want that?

China’s anti-dumping probe threatens Canola producers

The Chinese government said this week that it is starting an anti-dumping investigation into imports of Canadian canola. The announcement comes just a week after Canada’s federal government announced new tariffs on Chinese EVs, steel and aluminum.

Canadian farmers are bracing for the potential impact. This is another headwind after  shipments were disrupted after the four-day rail strike and following last year’s drought. China was Alberta’s second largest canola export market after the U.S. last year.

Canola has been in the cross-hairs of Canada-China trade tensions before. In 2019, China barred canola seed imports from two large Canadian companies, claiming pests in shipments. Shipments were reinstated in early 2022. 

Why population growth is likely to remain stronger in Alberta

The federal government’s new targets for non-permanent residents (NPRs) will pull down Canada’s population growth in the next two years. The federal government has announced new restrictions for Temporary Foreign Workers and reduced targets for international students.

As we’ve discussed, there is debate on how much population will slow, with the Bank of Canada’s forecasts not jiving with Statistics Canada’s much lower projections. But the direction (down) is clear.

What about Alberta? There will be an impact from the NPR targets, but not as great. As noted by the Business Council of Alberta, NPRs comprise 4.5% of Alberta’s population as of Q1 2024—already below the 5% national target set for 2027. In comparison, that same number is 8.9% in B.C.

In particular, the federal method for reducing international student targets is on a per capita basis. Yet, Alberta is well below the national average for per capita international students. The pullback will be borne disproportionately in B.C. and Ontario, with Alberta actually getting an increase in its allocation this year.

All told, based on the latest population numbers, we’ve revised up our population forecast for this year to 4.1% and next year to 2.5%. In addition to fewer NPRs, part of the slowdown comes from moderating net inflows of interprovincial migrants.

Wild ride - Crude oil prices

Concerns over waning Chinese demand and some easing of tensions in Libya weighed heavily on WTI oil prices this week. WTI prices plummeted from US$74.50/bbl last Friday to just below US$70/bbl on Wednesday and Thursday, even as OPEC said it will delay a return to output hikes. WTI averaged $US79/bbl through the first eight months of the year, just above our June forecast of $78/bbl.

Interesting Fact…B.C. exports shift more towards energy

Energy exports have taken on a more prominent role in the B.C. economy, accounting for one-third of total merchandise exports in 2023. With new LNG capacity being added, this share is expected to increase further. B.C.’s export mix has tilted away from forest products, once comprising over 50% of B.C.’s merchandise exports.

Chart of the Week: Deconstructing Canada’s trade surplus

This week Statistics Canada said Canada ran a small trade deficit in July, meaning our imports of goods and services were greater than our exports.

Let’s unpack that a bit.

First, the deficit came from our trade in services—things like travel, transportation and commercial services. That’s the typical pattern. With some rare monthly exceptions, Canada typically runs a service trade deficit.

The larger category is our trade in goods. Over the last decade, Canada’s monthly trade in goods oscillates between a surplus and deficit. For July, there was a small merchandise trade surplus of $684 million.

But that headline masks a lot of variation underneath as shown in our Chart of the Week.

Canada’s trade in energy was a surplus of $12.7 billion in July alone, while other categories like motor vehicles and industrial machinery showed a trade deficit.

Answer to the previous trivia question:The General Agreement on Tariffs and Trade was created in 1947.

Today’s trivia question: Where does the name “canola” come from?