Bank of Canada News

Statistics Canada released the real gross domestic product (GDP) figure for the final quarter of 2022 this morning, showing a marked slowdown in economic activity. This will undoubtedly keep the central bank on the sidelines when they announce their decision on March 8. The Bank had estimated the Q4 growth rate to be 1.3%. Instead, the economy was flat in Q4 at a 0.0% growth rate. This was the slowest quarterly growth pace since the second quarter of 2021.

Inventory accumulation in the fourth quarter declined for manufacturing and retail goods, driving investment in inventories to decline by $29.8 billion. Further, higher interest rates by the Bank of Canada hampered investment in housing (-8.8% at an annual rate), and business investment in machinery and equipment was a weak -5.5%. On the other hand, personal expenditure in the Canadian economy expanded by 2.0% (vs -0.4% in Q3), supported by the red-hot labour market. Government spending growth also accelerated. At the same time, net foreign demand contributed positively to GDP growth as exports grew by 0.8% while imports shrank by 12.0%.

Bank of Canada News

The weak Q4 result reduced the full-year gain in GDP for 2022 to 3.4%, compared to 2.1% in the US, 4.0% in the UK, and 3.6% in the Euro area.

The January GDP flash estimate was +0.3%, pointing towards a rebound in the first quarter of this year. However, flash estimates are always volatile and subject to revision. Nevertheless, the growth in GDP this year will likely be much more moderate, less than 1%.

Bottom Line

The weakness in today’s economic data will be good news to the Bank of Canada, having promised a pause in rate hikes to assess the impact of the cumulative rise in interest rates over the past year. Today’s GDP report and the slowdown in the January CPI inflation numbers portend no interest rate hike on March 8.

Now the Bank will be looking for a softening in the labour market.

Bank of Canada News

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Bank of Canada News

Decline in Inflation

Canadian inflation decelerated meaningfully in January despite the continued strength in the economy. Labour markets remain very tight, and retail sales continue strong. Nevertheless, the Bank of Canada’s jumbo rate hikes over the past eleven months have tempered inflation from a June ’22 peak of 8.1% y/y to 5.9% in January.

The 3-month average growth in the Bank of Canada’s preferred median and trim inflation measures – designed to look through volatility in individual product prices to better gauge underlying price pressures – are running at around 3.5% on a three-month annualized basis. That’s still above the BoC’s 2% inflation target but is well below peak levels last year.

Prices for cellular services and passenger vehicles contributed to the deceleration in the all-items CPI. However, mortgage interest costs and food prices continue to rise.

Decline in Inflation

Last month, inflation excluding food and energy, rose 4.9% y/y. Prices excluding mortgage interest costs rose 5.4%. In both cases, year-over-year price growth was slower than in December. Some of the decline in inflation was due to base-year effects. In January 2022, mounting tensions amid the threat of a Russian invasion of Ukraine, coupled with supply chain disruptions and higher housing prices, put upward pressure on prices.

Monthly, the CPI rose 0.5% in January 2023, following a 0.6% decline in December. Higher gasoline prices contributed the most to the month-over-month increase, followed by a rise in mortgage interest costs and meat prices.

Decline in Inflation

Another critical factor in today’s data is that inflation in services eased to 5.3% from 5.6%.

Food prices, however, remain elevated in January (+10.4%) compared to 10.1% in December. Grocery price acceleration in January was partly driven by year-over-year growth in meat prices (+7.3%), resulting from the most significant month-over-month increase since June 2004. Food purchased from restaurants also rose faster, rising 8.2% in January following a 7.7% increase in December.

Bottom Line

The Bank of Canada must feel pretty good about today’s inflation numbers. They confirm the wisdom of their announced pause in rate hikes at the January meeting. Despite continued strength in the labour market and January retail sales, headline and core inflation measures have declined again, with a five handle now on the headline rate. That is still a long way to the 3.0% inflation forecast by the end of this year, but it is moving in the right direction.

There will be no BoC action when they meet again on March 8. Their press release will be scrutinized for a hawkish versus dovish tone. Regardless of upcoming data, there is virtually no chance of any rate cuts this year

Decline in Inflation

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📧 jmuir@dominionlending.ca
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Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.
License #: 10145
92 Caplan Ave #609, Barrie, ON L4N 9J2

Decline in Inflation

December Housing 2022

The Canadian Real Estate Association says home sales in January were the lowest for the month since 2009 and fell 37.1% from a year ago. The Canadian housing market has been sliding for eleven consecutive months as the unprecedented rise in interest rates–up from 25 basis points to 4.5% for the policy rate–has moved buyers to the sidelines. This is an abrupt reversal in the fevered pace of home sales during the pandemic.

The rapid rise in interest rates, designed to combat inflation, has driven many buyers to the sidelines. Higher borrowing costs have reduced affordability despite the sharp decline in prices in many regions.

On a regional basis, sales gains in Hamilton-Burlington and Quebec City were more than offset by declines in Greater Vancouver, Victoria and elsewhere on Vancouver Island, Calgary, Edmonton, and Montreal.

December Housing 2022

New Listings

Last month, the number of newly listed homes rose 3.3% on a month-over-month basis, led by increases across British Columbia. Despite the slight increase, new listings remain historically low nationally. New supply in January 2023 hit the lowest level for that month since 2000.

With new listings up and sales down in January, sales-to-new listings eased back to 50.7%. This is roughly where it had been over the entire second half of 2022. The long-term average for this measure is 55.1%.

There were 4.3 months of inventory on a national basis at the end of January 2023. This is close to where this measure was in the months leading up to the initial COVID-19 pandemic lockdowns, considered historically slow.

December Housing 2022

Home Prices

Canadian home prices fell by the most on record in 2022 as rapidly rising interest rates forced a market adjustment that is still ongoing.

The Aggregate Composite MLS® HPI was 15% below its peak in February 2022. Looking across the country, prices are down from peak levels by more than they are nationally in many parts of Ontario and some parts of B.C. and down by less elsewhere. While prices have softened to some degree almost everywhere, Calgary, Regina, Saskatoon, and St. John’s stand out as markets where home prices are barely off their peaks at all.

In contrast, some East Coast markets have bottomed and appear to be trending higher.

Housing Construction Falls

In other news, CMHC reported that the annual pace of housing starts fell 13% in January. The national housing agency says the seasonally adjusted annual rate of housing starts for the year’s first month was 215,365 units compared with 248,296 in December.

This is very troubling as the population growth in Canada is slated to be very strong, and rental properties are in very short supply. The housing shortage will only rise. Rents have surged in many parts of the country for new inhabitants, straining household budgets even more.

With interest rates high and the cost of construction booming, many developers are moving to the sidelines.

December Housing 2022

There is a decline in MLS-HPI benchmark home prices in Canada and selected cities since prices peaked in March when the Bank of Canada began hiking interest rates. The most significant price dips are in the GTA and the GVA, where the price gains were spectacular during the Covid-shutdown.

Even with these large declines, prices remain roughly 33% above pre-pandemic levels.

Bottom Line

The Bank of Canada has promised to pause rate hikes assuming inflation continues to abate. We will not see any action in March. But the road to 2% inflation will be a bumpy one. I see no likelihood of rate cuts this year, and we might see further rate increases. Markets are pricing in additional tightening moves by the Fed.

There is no guarantee that interest rates in Canada have peaked. We will be closely monitoring the labour market and consumer spending.

December Housing 2022

Questions? Comments? Reach out:
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📲 705-606-2727
📧 jmuir@dominionlending.ca
💻 https://jonmuirmortgages.ca
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Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.
License #: 10145
92 Caplan Ave #609, Barrie, ON L4N 9J2

December Housing 2022

Red Hot Labour Market

Today’s Labour Force Survey (LFS) for January was much stronger than expected, once again calling into question how long the Bank of Canada’s rate pause will last. This report showed no evidence that the labour market is slowing in response to the vast and rapid runup in interest rates.

Employment surged by 150,000–ten times more than expected–and most of the gain was in full-time jobs. The employment rate has returned to pre-pandemic levels. Employment rates among people 55 to 64 have been on a solid upward trend since the summer of 2022, mirroring the rise in employment over that period observed among most demographic groups.

Red Hot Labour Market

Immigration remains a vital factor in hiring. According to the latest population estimates, in the third quarter of 2022, Canada’s population grew the fastest in over 50 years, mainly driven by an increase in non-permanent residents. In the Labour Force Survey, non-permanent residents represent the majority of a larger group, including those who were not born in Canada and have never been landed immigrants. Non-permanent residents can hold various kinds of work, study, or residence permits. On a year-over-year basis, employment for those not born in Canada and who have never been a landed immigrant was up 13.3% (+79,000) in January, compared with growth in total employment of 2.8% (+536,000).

Average hourly wages rose 4.5% on a year-over-year basis in January, down from 4.8% in December. This is good news for the inflation outlook, but it remains much above the 2% target. Year-over-year wage growth reached 5.0% in June 2022 and peaked at 5.8% in November (not seasonally adjusted).

The unemployment rate remained near a record low, holding steady at 5.0% in January, just shy of the record-low 4.9% in June and July last year.

Red Hot Labour Market

Employment growth was most robust in wholesale and retail trade, healthcare, education, other services and construction.

Bottom Line

The Canadian jobs market is showing no signs of slowing. This has to make the Bank of Canada at least a bit nervous. The US jobs market data in January was also robust, and the Fed Chairman, Jay Powell, has assured markets that interest rates are likely to rise further.

This is the last jobs report before the Bank of Canada meets again on March 8. The CPI data for January will be released on February 21 and will be the primary factor determining Bank action. If inflation continues to decline, as expected, the rate pause will hold. If not…

Red Hot Labour Market

Questions? Comments? Reach out:
—
📲 705-606-2727
📧 jmuir@dominionlending.ca
💻 https://jonmuirmortgages.ca
🌎 Google Business Page

Dominion Lending Centers – The Mortgage Source. Independently Owned and Operated.
License #: 10145
92 Caplan Ave #609, Barrie, ON L4N 9J2

Red Hot Labour Market