In this week’s ATB Economics Weekly Wrap…

• Consumer resiliency will be tested by higher interest rates;
• Accommodation and food, construction have the most job openings;
• Japan replaces China as Alberta’s second largest export market in 2022;
• International visitors to Alberta approaching pre-COVID levels;
• Much anticipated CPI report out next week.

Thank you Owl readers for your feedback on our inaugural “wrap” issue last week. This will help us improve this report!

What happened this week?

Resilient consumers show some signs of belt-tightening - Albertans have been persistent spenders in the face of higher interest rates. Retail spending rose an impressive 7.5% year-over-year (y/y) in the first four months of 2023, far surpassing the national increase of 3.5% and posting the second fastest increase after PEI. Even after accounting for higher prices, the estimated volume of spending in Alberta was up 4.1%. Perhaps most surprising is the strength in some of the more discretionary categories: shoe, clothing, and sport/hobby retailers recorded double-digit gains over this period. Sales at auto and parts dealers have also held up well (+7% year-to-date).

There are, however, some signs of shopping fatigue. April’s 0.9% monthly gain was decent, but it simply reversed most of March’s losses and spending remains below the very elevated January level. Spending at furniture, home furnishing, appliance and electronic retailers—a more interest rate sensitive category—has been relatively flat year-to-date (+0.6%).

To get a more timely read, we use higher frequency data drawn from aggregate ATB client transactions. We call it the ATB Alberta Consumer Index. The index suggests that spending dropped slightly in May, lending support to the cooling trend.

Bottom line: Our retail spending forecast (3.7% annual growth in 2023) remains on track based on the impressive year-to-date showing and expectations of fairly flat readings for the rest of the year. Population growth will continue to push, but debt service costs remain a headwind. While many households have already seen their interest costs increase, others will be impacted when they renew their mortgages (or other debt) at higher rates.

Help is wanted in Alberta, but where? - The search for workers continues. Job vacancies have come down from last spring, but remain well above pre-COVID levels in most industries.

Where are employers looking? The most job openings in the first quarter of 2023 were in accommodation and food services (15K), construction (12K), and healthcare and social assistance (8.5K)—together accounting for about 40% of provincial vacancies. The highest vacancy rates (i.e. vacancies as a share of workers required) belonged to accommodation and food (8.8%), construction (6.5%), and support services for oil and gas (5.7%).

Geographically, Calgary (35K) and Edmonton (30K) had the highest vacancies in the first quarter, but higher vacancy rates can be found elsewhere with the Rockies and North East region (5.7%) topping the list.

Bottom line: Elevated vacancies will support employment this year, offsetting the drag from higher interest rates and a softer global backdrop. The construction and accommodation and food industries, in particular, are in need of workers as they’ve entered their busiest season.

China driving oil demand growth - The International Energy Agency last week reminded us just how important China is to oil markets. Even with its lacklustre economic recovery from COVID-19 lockdowns, Chinese oil demand is expected to rise 0.93 million barrels per day (b/d) to 16.3 million (b/d) in 2023, representing 43% of global demand growth. The Agency expects global oil consumption to surpass pre-pandemic levels this year, and for the oil market to tighten in the second half as supply struggles to keep up.

Bottom Line: A tighter oil market should lend support to oil prices later this year. Our June economic forecast assumes West Texas Intermediate will average US$76/barrel in 2023, which implies an average of $77 in the second half of the year. This is close to the U.S. Energy Information Administration's June forecast of $75 for 2023.

What to watch for next week

Inflation numbers for May on June 27 - The consumer price index is perhaps the most watched monthly indicator of 2023 (even usurping the Friday jobs report!) as Canadians anxiously await the Bank of Canada’s next move in its campaign against inflation.

In its June rate announcement, the Bank of Canada said it expects inflation to be “around 3%” this summer given last year’s elevated energy prices. Keep in mind that gasoline prices in May were 19% lower than the same time last year, which should help with May’s CPI reading.* The tricky part will be getting from 3% to the 2% target, given a still tight labour market and stubbornly high service price inflation.

Financial markets are pricing in another interest rate increase in July given the Bank of Canada’s resolve to get inflation back to 2%. The stronger-than-expected retail sales gain in April reinforces this view. However, the Bank has also talked about data dependency. The summary of the deliberations of the Bank’s Governing Council released on Wednesday indicate that strong economic and inflation data likely tipped the scale towards a move in June. A July pause cannot be ruled out if the forthcoming CPI and labour market reports come in softer than expected.

As for Alberta, CPI inflation has tracked below the national average so far this year (4.1% in Alberta vs. 5.0% in Canada) and the provincial government has announced that it will extend fuel tax relief until the end of the year, preventing a tax-related bump in gasoline prices. We expect Alberta to move more in line with national inflation trends, and are calling for 3.6% annual average inflation this year and 2.2% next year.

*Source: Kalibrate Canada (monthly average)

Interesting fact…

In 2022, Japan surpassed China as Alberta’s second largest export market for the first time in over 10 years. Domestic merchandise exports to Japan spiked 105% to $5.15 billion, edging out Chinese bound exports of $5.04 billion (which were up by 12%).

What accounts for this sudden increase? Exports of propane scaled up from zero in 2019 (and prior) to $271 million in 2020, $437 million in 2021, and $1.8 billion last year as new facilities on Canada’s west coast have come online. China is, however, set to regain its number two position in 2023 as exports to the country have far outpaced those to Japan in the first four months. 

Daily trivia

Answer to the previous trivia question: The Millennium Clock (a.k.a. the 10,000-Year Clock) being built inside a mountain in Texas by the Long Now Foundation funded by Jeff Bezos will reportedly cost US$42 million.

Today’s trivia question: As of the 2021 Census, how many non-permanent residents were there in Canada?

Chart of the week: International visitors taking flight 

While Alberta’s economy has bounced back from the COVID-19 recession, the recovery has been uneven. Some key indicators of activity have yet to find their way back. 

In this chart of the week, we look at one of those indicators: international travel to Alberta. International visitors to Alberta came in at 84,700 (seasonally adjusted) in April, up 67% compared to the previous April. The number of international visitors is now 81% of its pre-pandemic peak. At the low point in July 2020, there were only 1,300 foreign visitors to Alberta representing a mere 2% of peak levels.  

We are getting closer to more “normal” levels of foreign visitors. According to more timely daily data on foreign visits to Edmonton and Calgary International airports, there was a 69% jump in May over the same month last year.  

The restaurant industry was also walloped by COVID, with sales** plummeting 57% peak to trough. Fortunately, Albertans are dining out again and sales are now 17.5% higher (as of April 2023) than before COVID. After adjusting for elevated “food from restaurant” inflation, spending is up from its previous peak by a much more modest 3.6%.

Other metrics have still not returned. Employment in the food and accommodation sector is 88% back to where it was in February 2020 (up from the trough of 47%). As discussed above, the sector has the province's highest job vacancy rate, and is now eager to recruit employees to respond to rising demand.

Bottom Line: Tourism will be a key growth driver for Alberta, with international visitors likely to return to pre-COVID levels later this year. Tourism Calgary expects the number of visitors and total tourism revenue to exceed 2019 levels in Calgary in 2023 while an older forecast published by Travel Alberta sees a full recovery in tourism spending for the province as a whole this year.

**Includes full- and limited-service restaurants, caterers, and drinking places (i.e, pubs and bars).