Canada's economy is slowing quickly as inflation, rising rates take hold – The Globe and Mail
The Canadian economy posted robust growth in the second quarter, but there are mounting signs of a slowdown as consumers grapple with sky-high inflation and rising interest rates.
Real gross domestic product stalled in May, which was better than the initial estimate of a 0.2-per-cent drop, Statistics Canada said in a report on Friday. The economy eked out growth of 0.1 per cent in June, according to a preliminary estimate. Thanks to stronger growth in April, Canada’s economy is on track to expand by 1.1 per cent in the second quarter, or an annualized rate of 4.6 per cent.
For financial analysts on Bay Street, the report was a mixed bag. Economic growth in the April-to-June period was stronger than the Bank of Canada’s forecast of 4 per cent. It was also markedly better than in the United States, which has posted two consecutive quarters of declining GDP, sparking a hearty debate over whether the country is mired in a recession.
On the other hand, recent months have seen sluggish growth in Canada. Consumer and business confidence is tumbling. The real estate industry has turned cold. And some high-profile companies in the tech sector – such as Shopify Inc. – are announcing layoffs.
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Stephen Brown, senior economist at Capital Economics, said he was surprised by the tepid estimate for June growth, given that hours worked that month jumped by 1.3 per cent. Moreover, he noted that Canada’s economic recovery from COVID-19 has lagged behind the U.S. pace, and therefore Canada’s better fortunes of late are not as impressive as they seem.
“The fact that we’re already seeing a slowdown is a bit concerning,” Mr. Brown said. “We’ve been fairly bearish on the outlook for Canada, just because of the housing sector, but it does seem that we’re getting broader weakness elsewhere than was maybe anticipated.”
Despite the shift, the Bank of Canada is widely expected to continue hiking interest rates as it looks to tamp down inflation that is running near a four-decade high. The bank has raised its policy rate to 2.5 per cent from a pandemic low of 0.25 per cent in less than five months.
“The Bank of Canada is still expected to deliver a further, non-standard, rate hike at its next meeting” in September, said Andrew Grantham, a senior economist at CIBC Capital Markets, in a note to clients. “However, we expect that the impact on disposable incomes of high inflation and rising interest rates will start to show up more widely in economic data for the second half of the year, allowing the Bank of Canada to pause with rates just above 3 per cent.”
Friday’s report showed a split between the goods and services sides of the economy, the latter of which is getting a boost from consumers embracing the travel and entertainment industries.
The transportation and warehousing sector rose 1.9 per cent in May. Despite well-publicized headaches at major airports, economic output in air transportation jumped 14.1 per cent.
The hospitality sector also rose 1.9 per cent, its fourth consecutive month of expansion. Restaurant sales grew quickly this spring, in spite of sticker shock on menus.
The goods side was undoubtedly weaker. Real GDP fell 1.7 per cent in manufacturing, the first decline in eight months. Statscan said auto production was hampered by the lingering semiconductor shortage, in addition to refurbishments of some assembly plants.
Output fell 1.6 per cent in construction, the industry’s second consecutive monthly drop. Statscan noted that many of Ontario’s unionized construction workers were on strike in May, leading to delays for various projects. Residential-building construction dropped in May, but activity was 11 per cent higher than at the outset of the pandemic.
“We’re seeing a downturn in renovations and improvements, which is linked to the housing market,” Mr. Brown said. “Obviously, to the extent fewer investors are flipping homes, that means they’re going to be putting less money into improving them.”
Mr. Brown also pointed to preconstruction home sales in Toronto, which have fallen sharply. “That suggests we’ll see a downturn in housing starts over the second half of the year, just because so many developers rely on those preconstruction sales to get the initial funding.”
The outlook for Canada’s economy is murky. Recession fears are rising, although very few economists are projecting a sustained downturn. The Bank of Canada forecasts growth will slow to an annualized rate of 2 per cent in the third quarter. It also expects the economy to grow 1.8 per cent in 2023 – a hefty downgrade from 3.2 per cent in a previous forecast.
“On balance, we look for growth to cool notably in the second half to below a 1-per-cent annualized clip, a marked slowdown, albeit firmer than U.S. trends,” Bank of Montreal chief economist Doug Porter wrote in a research note.
The country, he added, “can’t fully avoid the pull of a slowing U.S. economy and the Bank of Canada’s aggressive rate hike campaign.”
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Sharp drop in inflation suggests interest rates have peaked: ING – Mortgage Rates & Mortgage Broker News in Canada – Canadian Mortgage Trends
The sharp drop in February’s headline inflation reading suggests rates have now peaked and that the next rate move will be a cut.
That’s the take from ING’s Chief International Economist James Knightley following a second straight month of Canada’s annual inflation rate surprising to the downside.
The consumer price index slowed to an annual rate of 5.2% in February, Statistics Canada reported on Monday, marking the largest deceleration since February 2020. That’s down from a reading of 5.9% in January and slower than the 5.4% rate expected by a Bloomberg survey of economists.
Most economists believe the drop in inflation all but guarantees another rate pause by the Bank of Canada at its April 12 meeting.
Some, like Knightley, are going further and calling for at least one 25-basis-point rate cut before the end of the year, particularly against the backdrop of the current global banking challenges. That would knock the Bank’s overnight target rate back down to 4.25% from its current rate of 4.50%.
“We still think the next move in the BoC policy rate will be downwards and that the first cut is likely to come before the end of the year,” Knightly wrote. “Canada’s greater exposure to interest rates rate hikes via a high prevalence of variable rate borrowing means consumer activity should slow through 2023.”
Additionally, higher household debt levels in Canada—more than 180% of disposable income versus 103% in the U.S.—means Canada is “especially exposed to the risk of a housing market correction in a rising interest rate environment.”
“Falling inflation rates will give the BoC the room to respond with looser monetary policy, especially with the Finance Minister Chrystia Freeland suggesting her upcoming budget will ‘exercise fiscal restraint’ to help in the battle against inflation,” Knightly added.
BMO’s Douglas Porter added that, with inflation subsiding at its current pace, “there’s really no underlying reason for the Bank to hike further.”
“Overall, the Bank’s pause looks prudent, and we expect them to stay at current levels for quite some time, barring a major flare-up in the banking turmoil,” he wrote.
The rise in shelter costs is slowing
Digging into the details of StatCan’s February inflation report, shelter costs rose at a slower pace year-over-year for the third consecutive month.
Slower growth was recorded in homeowners’ replacement cost, which is related to the price of new homes, which rose at an annual pace of +3.3% compared to +4.3% in January. Other owned accommodation expenses, which includes real estate commissions, also eased to +0.2% in February, down from a rate of +1.1% in January.
However, one shelter component remains one of the biggest drivers of overall inflation: mortgage interest cost, which climbed by 23.9%, up from +21.2% in January. This was the largest increase in 40 years, Statistics Canada noted. “Many will thus point to the BoC as the ’cause’ of inflation,” wrote BMO’s Porter, “although note that inflation is still 4.7% even excluding mortgage interest costs.”
That contributed to a moderate 0.3% month-over-month gain in CPI excluding food and energy.
The Bank of Canada’s preferred measures of core inflation also continued to ease, with CPI trim falling to +4.8% (from +5% in January), CPI median down to +4.9% (from +5%) and CPI common decelerating to +6.4% (from +6.6%).
Alberta premier pitches more gas-fired power plants as UN climate panel calls for phaseout
Premier Danielle Smith says renewable energy is unreliable and that Alberta should build additional gas-fired power plants for a more predictable source of electricity.
“This is a natural gas basin,” Smith told delegates at the Rural Municipalities of Alberta (RMA) convention in Edmonton on Wednesday. “We are a natural gas province. And we will continue to build natural gas power plants, because that is what makes sense in Alberta.”
In response to questions from rural councillors, Smith also said she’s looking at ways to ensure solar and wind companies set aside money to reclaim land in the future for when a renewable installation is dismantled.
“I think that it needs to be addressed at the start, or we’re going to have the same problem that we had with the orphan wells, and why would we want to bring that to the province of Alberta?” said Red Deer County Mayor Jim Wood.
Smith said she met with power providers and learned the province’s electricity grid twice came close to needing more power than it could supply in the last few months.
She pointed to stagnant air and solar panels covered with snow and ice leading to a dearth of wind and solar generation at those times.
The emissions from natural gas plants can be captured and sequestered to meet climate targets, she said.
Smith’s promotion of more natural gas-fired power plants comes days after the United Nations’ Intergovernmental Panel on Climate Change said wealthy countries should phase out gas plants by 2035 to prevent irreversible damage to the planet.
The premier said it concerns her to see solar panels and wind farms installed on arable land.
Kara Westerlund, vice-president of RMA, says rural councils share that concern. She told reporters the installations should be going onto brownfields rather than “taking some of the best growing soils and agricultural land out of production.”
She sees renewable energy sources as complementary to oil and gas.
“We’ve never felt that one is going to replace the other,” Westerlund said.
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RMA members previously voted for a resolution calling on the province to require renewable companies to pay for a bond that would cover the costs of removing solar panels or wind turbines past their useful lives.
The province already has a regulation from 2018 that stipulates how the sites are to be decommissioned.
Smith said she’s considering requiring renewable companies to set aside a proportion of revenue to save for site cleanup costs — and that the remediation money should transfer to any new site owners.
However, devising a solution for unreclaimed oil and gas sites is Smith’s priority.
“Once people feel comfortable that we’ve got the right model there, then the next obvious question is, what are we going to do about solar and wind?” she said.
According to the Alberta Energy Regulator, there are nearly 200,000 inactive or abandoned wells in the province.
Binnu Jeyakumar, director of electricity at the Pembina Institute, said inactive oil wells and renewable sites aren’t the same.
“We get orphan wells because we run out of viable gas production in these locations,” she said. “You don’t run out of wind or solar in a location.”
When equipment breaks down, it may be viable for an owner to install new turbines or panels, she said.
Jeyakumar also challenged the premier’s assertion that solar and wind are unreliable sources of electricity. She said hours of sunlight and weather are predictable: an electrical system operator can plan for those fluctuations by using diverse sources of energy, and by building more storage, transmission and distribution systems.
Most solar panel systems are built so snow and ice slide off or melt, she said.
She said building a new gas plant is a risky commitment in a world where energy prices fluctuate wildly and the power plant is likely to be around for another 30-to-40 years. She said there are sound reasons why investors are turning to renewables.
“I’m not saying we should only build solar,” she said. “But we should be basing our grid on solar and wind, because they are the cheapest options.”
‘We are a natural gas province’: Smith says Alberta needs power plants, not wind and solar
Alberta’s premier assured a ballroom of rural leaders Wednesday that she does not want to see the province move away from electricity generated from fossil fuels, while complaining about solar panels covering farm land.
“This is a natural gas basin. We are a natural gas province and we will continue to build natural gas power plants because that is what makes sense in Alberta,” Danielle Smith said.
“Yes, hydro makes perfect sense in Quebec and B.C. and Manitoba. And Ontario has nuclear and hydro as well. But we have to keep fueling our economy with natural gas power plants.”
Smith made the comments at the spring convention of the Rural Municipalities of Alberta (RMA) that was held in downtown Edmonton. The RMA is made up of 69 counties and municipal districts.
She added that carbon capture and usage will help Alberta meet emissions goals, but didn’t mention climate change.
The premier’s comments on power came after she was asked about a lack of municipal control in project approval and solar panels covering “prime land” without cleanup bonds in place to make sure companies pay for reclamation.
“I’m supportive of solar and wind projects where they make sense. But I can tell you from conversations with people in my own community that putting solar panels on prime agricultural land does not make sense,” Smith responded.
“Especially like the one I drive past in Brooks every day I go down there. It’s covered in ice and snow and not generating any power at all.”
Jim Wood, mayor of Red Deer County, also asked Smith what Alberta is doing to make sure renewable energy companies clean up projects that one day become defunct.
“The concern is this: Some of these solar may be only viable due to carbon-credit grants and so forth that may not be here forever. The companies may not have enough finances to in fact do the cleanup,” Wood said.
“And if they’re not viable enough to put a bond up to cover their cleanup, then they’re not viable. And I think it needs to be addressed at the start or we’re going to have the same problem as the orphan wells. And why would we want to bring that to the province of Alberta?”
Smith said legislation requiring cleanup bonds is an “open question” for her government and one she plans to consult rural leaders on in the future.
The premier has faced widespread criticism lately over a plan to give royalty breaks to oil companies for cleaning up inactive wells, which they’re already legally required to.
The province’s energy minister last week called the Opposition “anti-oil and gas activists” after an NDP MLA demanded companies pay for the cleanup themselves.
The NDP claims the government’s proposed $100 million Liability Management Incentive Program is only the start of a $20 billion giveaway to oil and gas companies.
MLA Marlin Schmidt called the initiative “a scam” in the legislature, drawing a warning from Speaker Nathan Cooper for use of the word.
On Wednesday, Smith acknowledged Alberta first needs to figure out how to get orphan wells reclaimed before requiring renewables companies to do the same, but like wells, believes it will become an issue in the future.
“In the case of wind-turbine farms, as I understand it, when installing them typically is 1,500 truckloads to install them, that means someone has to pay 1,500 truckloads to take them away,” she said.
NDP Leader Rachel Notley agreed that there needs to be plans in place to clean up all energy projects, but said the government is going about it in the wrong way.
“Danielle Smith is campaigning on giving billions of taxpayers’ dollars to financially solvent companies that are choosing not to clean up after themselves. She can’t be trusted on this issue,” she said in a statement to CTV News Edmonton.
Political scientist Duane Bratt said he wasn’t surprised by Smith’s comments because being loud cheerleaders of the oil and gas industry is a clear strategy of the UCP government.
“When they talk about renewables, they talk about it not working when the wind isn’t blowing and the sun isn’t shining and so pivoting to waste issues on renewables, that’s totally on brand,” he said.
Last year, Alberta had an installed capacity, the maximum electrical output under specific conditions, of 67 per cent from natural gas and coal and 31 per cent from solar, wind and hydro, according to Alberta Electric System Operator (AESO).
In 2019, about 89 per cent of Alberta’s electricity came from fossil fuels and 10 per cent from renewables, according to the Canada Energy Regulator.
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