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What Bank of Canada’s ‘data dependence’ means for the coming interest-rate decision

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The Bank of Canada is heading into its Jan. 25 interest-rate decision with a different watchword: “data dependence.”

Over the past eleven months, the central bank has pushed its policy rate up to 4.25 per cent from 0.25 per cent with single-minded determination. The question wasn’t whether it would increase borrowing costs at each meeting, but by how much.

Now, with interest rates firmly in restrictive territory and inflation trending down, Bank of Canada officials have turned off autopilot and are poring over economic data for signs of whether it’s time to hit pause on monetary-policy tightening.

“If we are surprised on the upside, we are still prepared to be forceful,” deputy governor Sharon Kozicki said in December, after the latest half-percentage-point rate increase.

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“But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy. In other words, we are moving from how much to raise interest rates to whether to raise interest rates.”

Data published since the December rate decision – including stubbornly high core-inflation numbers from November and a blowout December jobs report – suggest that the Canadian economy has more momentum than the bank would like to see. That increases the odds of another rate hike, and financial markets are pricing in a quarter-point move on Jan. 25.

But there are still several crucial economic releases coming this week. And for the first time in nearly a year, another rate increase isn’t a sure thing.

“There are two risks right now,” said Avery Shenfeld, chief economist of Canadian Imperial Bank of Commerce.

“One is that they’re not patient enough to see the impact of the hikes they’ve done, and they end up over-hiking and causing a deeper recession than they intended. But there’s also a risk of waiting too long to hike again and finding that inflation reaccelerates. So it’s a balancing act and they’re at the point of the cycle where a finely tuned judgment is required.”

Here’s what the central bank will be watching as it plans its next move.

Inflation

After hitting a four-decade high of 8.1 per cent in June, the annual rate of consumer-price-index inflation had fallen to 6.8 per cent in November. Economists expect to see a further drop in the December inflation data, which will be published Tuesday.

Gasoline prices have fallen sharply since the summer, plunging another 13 per cent month over month in December. Meanwhile, goods prices are levelling off thanks to supply chain improvements and falling shipping costs.

But many service prices continue to rise rapidly. And core inflation, excluding food and energy, is proving sticky. Central-bank officials say they’re paying particularly close attention to three-month rates of core inflation.

“In the second half of 2022, inflation has very clearly receded, so looking at a 12-month number isn’t giving you an accurate indication of what inflation pressures are right now,” said Taylor Schleich, director of economics and strategy at National Bank Financial.

“Those three-month indicators that they’ve highlighted have come down very substantially,” he said. “We were at 7 or 8 per cent in May or June, and now we’re around 3 to 4 per cent.”

Inflation expectations

The Bank of Canada doesn’t just look at inflation data; it looks at what Canadian consumers and businesses believe about inflation. These beliefs can drive wage negotiations and price-setting decisions.

The key data on inflation expectations will be published Monday, with the release of the Bank of Canada’s quarterly business and consumer surveys. Over the past year, both surveys have consistently found that individuals and companies expect inflation to remain well above the bank’s 2-per-cent target for several years to come.

There were, however, some positive signs in the last Business Outlook Survey, published in October. The average respondent expected 4.26-per-cent inflation in two years’ time, down from 4.8 per cent in the previous quarter. Companies also reported improvements in their supply chains, and lowered their expectations, on average, about future wage increases – two signs that inflationary pressures may be easing.

Labour markets

So far, the most compelling argument for another rate hike comes from the December jobs report, published by Statistics Canada earlier this month. Canada added 104,000 jobs in December, far more than the consensus forecast of 5,000 jobs among Bay Street analysts. The unemployment rate dropped to 5 per cent from 5.1 per cent, leaving it only a notch above the record low.

The remarkable strength of the job market is good news for many workers. But it’s a problem for the Bank of Canada.

Low unemployment and high demand for workers fuels wage growth, which can feed into inflation, particularly in the service sector, as companies increase prices to cover rising labour costs. Governor Tiff Macklem has argued that unemployment needs to rise to get inflation back to target.

“We are starting to see some improvements in the balance in the labour market. Vacancy rates have come down,” Mr. Macklem said at a December news conference. “But we continue to see tight labour markets, we continue to hear from businesses that they’re having trouble hiring the workers they need.”

Economic growth

Ultimately, the Bank of Canada is trying to engineer a general slowdown in the economy to bring demand for goods and services back in line with supply. The challenge is that monetary-policy tightening works with a considerable lag, making it impossible for the bank to judge the impact of rate hikes in real time.

“Inflation indicators are actually not quite as important as growth indicators,” said Mr. Shenfeld of CIBC. “If they see the economy slow enough, they will trust that that will bring inflation down over time. And they’ll be watching things like employment and retail sales and the housing sector for signposts of that.”

Data on November retail sales and December housing starts will be published this week. The bank is also putting more emphasis on high-frequency data, such as restaurant and hotel bookings and public-transit usage.

“When interest rates were 2 per cent, they didn’t need such a fine sieve to look at the economic data, because they were confident that the economy still had a lot of momentum,” Mr. Shenfeld said.

“The closer they get to shutting off the rate hikes, the more they’ll have to look at every bit of information coming in the door.”

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A shortage of pilots is making travel chaos in Canada even worse – CBC News

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From pandemic-related travel restrictions to extreme weather events, Canada’s travel industry has navigated an unprecedented amount of uncertainty of late. And now, just as demand for travel has returned to its 2019 level, airlines are navigating their next patch of turbulence: a lack of qualified pilots.

According to Transport Canada, in a typical pre-pandemic year, roughly 1,100 pilot licences were issued. When complemented by foreign-trained pilots, that was generally more than enough to satisfy the needs of carriers as large as WestJet and Air Canada, all the way down to regional, charter and cargo airlines.

But as demand for flying collapsed in 2020, so did the number of new pilots getting their paperwork. Government data shows less than 500 licences were awarded in 2020, a figure that fell to less than 300 in 2021 and just 238 last year.

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The department told CBC News in a statement that while labour shortages in the airline sector has been “identified as a priority area for action,” there are no current plans to loosen regulations. But the agency says it’s doing what it can to “increase the competitiveness of the Canadian flight training industry as well as improve the viability of aviation careers to address any shortages.”

Whatever changes do come will do little to help anyone in the short term, and travellers are already seeing the impact of the industry’s current labour crunch.

Staff shortages were a factor in charter airline Sunwing’s cancellation of 67 flights over the last two weeks of December, along with extreme weather.

Salaries for experienced pilots generally go up faster and higher at the major airlines than they do at most others, they are so typically able to have their pick among those available. That causes shortages just about everywhere else.

The head of the Air Transport Association of Canada says it’s a problem that had been brewing for many years, even before the pandemic.

“We haven’t had enough pilots for a long time, mostly at the regional level,” John McKenna said.

Long, expensive process

Getting a commercial licence is the last step in a multi-year process of becoming a pilot, a journey that can cost tens of thousands of dollars and take years.

In Canada, for many that journey ends with a dream job at either WestJet or Air Canada, but because of the expense and time commitment of training a new pilot, the major airlines often hire top staff from smaller carriers instead of methodically developing their own.

“Their fishing grounds is the regional carriers. And the regional carriers go down to the smaller carriers, air taxi groups … those levels have been hurting for many years,” McKenna said.

Canada’s two biggest airlines told CBC News in emailed statements that while there is indeed a higher than normal demand for pilots right now, both of them are managing to meet their needs.

“As a large global carrier operating the most modern, largest aircraft, we are a very desirable destination for talented pilots,” AIr Canada said. “As a result, we are able to attract pilots as required.”

“We have and continue to responsibly manage and plan our operations to meet the anticipated demand of our guests and are fully staffed across our network to support our operation,” WestJet said.

That’s not the case for everyone else. Small airlines often have so few pilots on staff that it doesn’t take the loss of very many to stop planes from flying.

Dave Boston
Dave Boston is a licensed pilot and also runs a job board to help other pilots find work. (Dave Boston)

In the fall, Sunwing applied to bring in more than 60 temporary foreign workers to meet demand for pilots, but that application was rejected, which exacerbated the chaos seen at the end of 2022. The airline has since cancelled almost all flights out of Saskatchewan and most out of Manitoba for the rest of the winter travel season.

Pandemic reduced numbers, too

It’s not just the big boys gobbling up all the qualified pilots, either. Many simply left the profession during the pandemic.

“Two years ago, to the day, literally almost every pilot [was] out of work,” says Dave Boston, a pilot with 25 years experience who’s also the man behind Edmonton-based aviation job board, Pilot Career Centre.

Faced with furloughs and layoffs at airlines big and small, many pilots tried to wait it out, but many simply moved on, he told CBC News in an interview.

“Many who had businesses or other interests, after maybe six months to a year, had to put food on the table, and they left the industry,” Boston said.

For the pilots who are left, headhunting is the new normal. He says he hears from desperate airlines every day, because they either can’t find the staff, or just lost yet another one. “It’s very common for pilots, unfortunately, to work there for six months [then] get a surprise interview that they don’t expect to get, and then they’re gone,” he said.

“It’s a real challenge right now.”

Zona Savic, right, listens to her instructor inside the cockpit of a flight simulator unit at Seneca College. Savic has long dreamt of being a pilot, and a lack of qualified flyers means she should have plenty of job prospects once she graduates.
Zona Savic, right, listens to her instructor inside the cockpit of a flight simulator unit at Seneca College. Savic has long dreamt of being a pilot, and a lack of qualified flyers means she should have plenty of job prospects once she graduates. (Shawn Benjamin/CBC)

One person hoping to meet that challenge is Zona Savic, a soon-to-be graduate of one of Canada’s premier aviation schools, Seneca College in Peterborough, Ont.

While she had planned to go into engineering, she joined the Air Cadets while in high school, and was quickly bitten by the aviation bug.

“I just knew from the moment that I was in that plane, this is what I was going to do,” she told CBC News in an interview.

She’s on track to get her pilot’s licence soon, and while she may do additional training to become an instructor herself, she says it’s a load off her mind to know that she won’t have to worry about finding a job.

And even better for the industry, she has no qualms about working her way up at smaller carriers flying niche, remote routes.

” I just love the feeling of flying, so if that’s what I’m doing, I don’t really care if I’m in Paris, or in Nunavut,” she says. “Anything is good for me, as long as I get to experience that.”

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Q4 economic growth slows to 1.6% as aggressive hikes bite – BNN Bloomberg

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Canada’s economy geared down at the end of 2022, growing at about half the pace of the third quarter and setting the stage for a period of little to no growth.

Preliminary data suggest gross domestic product was flat in December as increases in retail, utilities and the public sector were offset by decreases in the wholesale, finance and oil and gas industries, Statistics Canada reported Tuesday in Ottawa. That followed a 0.1 per cent gain in November, which matched economist expectations in a Bloomberg survey, and a 0.1 per cent increase in October.

Overall, the monthly gains point to annualized growth in the fourth quarter of 1.6 per cent, according to an initial estimate from the statistics agency. Though it will likely be revised, it’s down sharply from a 2.9 per cent pace in the third quarter, 3.2 per cent during April to June, and 2.8 per cent in the first three months of last year.

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The numbers show that higher interest rates, which have jumped 425 basis points since last March, are slowing economic activity and weighing on consumption. The lagged effects of the Bank of Canada’s aggressive tightening campaign are expected to drag growth to a halt this year, with economists seeing two quarters of shallow contraction in the first half of 2023.

That’s a key reason why Governor Tiff Macklem and his officials said this month they plan to hold the benchmark overnight lending rate at 4.5 per cent if growth and inflation evolve broadly in line with their outlook. While the 1.6 per cent growth in the final quarter is slightly stronger than policymakers forecast last week, signs of slowing demand are mounting.

“The economy hasn’t yet absorbed the impact of past rate hikes,” James Orlando, an economist at Toronto-Dominion Bank, said in a report to investors. “Even though today’s growth numbers are holding up well, the BoC can feel comfortable keeping its policy on cruise control a little while longer.”

In November, growth in services-producing industries was partially offset by a decline in the goods sectors, the statistics agency said. Interest-rate increases continued to dampen activity for real estate agents and brokers, residential building construction, and legal services which have been trending downward since spring.

Construction dropped 0.7 per cent, with new construction of single detached homes and home improvement leading the decline. Accommodation and food services contracted 1.4 per cent on lower activity in bars and restaurants. Retail trade decreased 0.6 per cent, with the food and beverage subsector falling to its lowest level since April 2018.

The central bank expected fourth-quarter growth of 1.3 per cent annualized, while economists in Bloomberg surveys predicted a gain of 0.9 per cent. Official data for December and the fourth quarter will be released Feb. 28.

Based on initial estimates, Canada’s economy expanded 3.8 per cent in 2022, broadly in line the Bank of Canada’s estimate for a 3.6 per cent growth.

“The overriding message is that the economy is just managing to keep its head above water, which squarely fits with the BoC’s view,” Doug Porter, chief economist at Bank of Montreal, said in a report to investors.

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Nike sues Lululemon, says footwear infringes patents – CTV News

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Nike sued Lululemon Athletica on Monday, saying that at least four of the Canadian athletic apparel company’s footwear products infringe its patents.

Nike in a complaint filed in Manhattan federal court said it has suffered economic harm and irreparable injury from Lululemon’s sale of its Blissfeel, Chargefeel Low, Chargefeel Mid and Strongfeel footwear.

Nike said its three patents at issue concern textile and other elements, including one addressing how the footwear will perform when force is applied.

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The Beaverton, Oregon-based company is seeking unspecified damages.

Lululemon, based in Vancouver, British Columbia, did not immediately respond to requests for comment.

(Reporting by Jonathan Stempel in New York; editing by Christopher Cushing) 

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