Canadian Home Sales Continued Their Upward Trend in January As Prices Fell Modestly

The Canadian Real Estate Association announced today that home sales over the last two months show signs of recovery. National sales were up 3.7% between December 2023 and January 2024, building on the 7.9% gain in December. The chart below shows that despite the two-month rise, sales remain 9% below their ten-year average. According to Shaun Cathcart, CREA’s Senior Economist, “Sales are up, market conditions have tightened quite a bit, and there has been anecdotal evidence of renewed competition among buyers; however, in areas where sales have shot up most over the last two months, prices are still trending lower. Taken together, these trends suggest a market that is starting to turn a corner but is still working through the weakness of the last two years.”

National gains were once again led by the Greater Toronto Area (GTA), Hamilton-Burlington, Montreal, Greater Vancouver and the Fraser Valley, Calgary, and most markets in Ontario’s Greater Golden Horseshoe and cottage country.

The actual (not seasonally adjusted) number of transactions was 22% above January 2023, the most significant year-over-year gain since May 2021. While that sounds like a resounding rise in activity, January 2023 posted the weakest transaction level in nearly twenty years.

There is pent-up demand for housing, and recent buyers are lured back into the market by the recent price decline and the fear that prices could rise significantly once the Bank of Canada starts cutting interest rates. 

New Listings

The number of newly listed homes increased 1.5% month-over-month in January, although it remains close to the lowest level since last June.

“The market has been showing some early signs of life over the last couple of months, probably no surprise given how much pent-up demand is out there,” said Larry Cerqua, Chair of CREA.

With sales up by more than new listings in January, the national sales-to-new listings ratio tightened further to 58.8% compared to under 50% just three months earlier. The long-term average for the national sales-to-new listings ratio is 55%. A sales-to-new listings ratio between 45% and 65% is generally consistent with balanced housing market conditions, with readings above and below this range indicating sellers’ and buyers’ markets, respectively.

There were 3.7 months of inventory on a national basis at the end of January 2024, down from 3.8 months at the end of December and 4.1 months at the end of November. The long-term average is about five months of inventory.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) fell by 1.2% month-over-month in January 2024, adding to the 1.1% price decline in December.

Price descents of late have been predominantly in Ontario markets, particularly the Greater Golden Horseshoe and, to a lesser extent, British Columbia. Elsewhere in Canada, prices are mostly holding firm or, in some cases (Alberta and Newfoundland and Labrador), continuing to rise.

The Aggregate Composite MLS® HPI was up 0.4% year-over-year in January 2024, similar to readings over the past six months.

Bottom Line

Sales in December and January generally run at about half the peak spring season pace. That could be especially true this year, with interest rates likely to begin falling by mid-year. A strong housing rebound is coming. Housing markets have bottomed, buyer sentiment is improving and fixed mortgage rates have started declining.

Housing markets in Toronto, Vancouver and Montreal are relatively balanced again, and with the spring season, we will see a rise in new listings.

In other news, the inflation data released yesterday in the US were higher than expected, pushing rate-cut forecasts further out. With the strength in the US economy, the 5-year government of Canada bond yield has quietly risen more than 50 basis points this year.

Canada’s Housing Minister, Sean Fraser, said he expects the fall in interest rates this year to encourage builders to ramp up their activity, helping to alleviate some of the country’s crunched housing supply. At a news conference yesterday, the minister said, “My expectation is if we see a dip in interest rates over the course of this year, a lot of the developers that I’ve spoken to will start those projects that are marginal today.”

Sean Fraser, asked whether he’s concerned that Bank of Canada rate cuts will unleash pent-up demand and higher home prices, said lower borrowing costs should also lead to an increase in supply. Fraser said whatever happens with rates, the government’s course of action will remain the same. “We need to do everything we can as quickly as we can to build as many homes as we can. And that’s going to be true today and six months from now, regardless of what may happen in the interest rate environment that we’re dealing with.”

At a news conference last week, Bank of Canada Governor Tiff Macklem said that while he’s heard from developers who’ve indicated higher rates are delaying projects, lowering rates would have a more significant impact on demand.

“It’s very clear in the data that the effects of interest rates on demand are much bigger than those on supply,” he told reporters.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

January Jobs Report Dispells Recession Fears

Today’s StatsCanada Labour Force Survey for January was a mixed bag and shows the dramatic effect of surging immigration. Canadian employment rose by a stronger-than-expected 37,300, but part-time jobs rose by 48,900, and in the public sector, the gain was huge. The employment rate fell a tick because population growth outpaced employment growth. The working-age population surged by 125,500 in a single month and is up by a remarkable 1 million adults year-over-year.

This ballooning of the working-age population is without precedent. In the past, it has never grown more than 500,000 in any year. Holy Cow, what are we doing?  Where will all of the people live, where will their kids go to school, where will the new hospitals be built, not to mention the transportation infrastructure on already crowded subways and roadways?

The unemployment rate fell a tick to 5.7%, the first such drop since December 2022. This reflected the 0.2 percentage point decline in the labour force participation love to 65.3%, as the number of people in the labour force held steady and the population rose.

Most of the new jobs were in the service sector, led by wholesale and retail trade, and finance, insurance, real estate, rental and leasing. There were declines in other sectors, especially in accommodation and food services.

In  January, average hourly wages were up 5.3% year-over-year, still way too high for the Bank of Canada. According to Statistics Canada, average hourly wages rose 5.9% to an average of $60.58 for employees with hourly wages in the top 25% of the wage distribution in January 2024, compared with an increase of 4.6% (to $17.64 per hour) for those with hourly wages in the bottom 25% of the wage distribution (not seasonally adjusted). Of course, the highest-paid workers earn a salary and are not paid by the hour.

Bottom Line

The next Bank of Canada announcement date is on March 6th. There is plenty of data yet to come out before then. But judging from what we already know, the economy is not in recession, and wages are still rising too rapidly. Housing markets are already beginning to heat up, and the US economy is running red hot. The strong US inevitably spills into Canada. This gives the BoC more time to ponder inflation. So far, there is no hurry for them to cut rates.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

The Bank of Canada Holds Rates Steady And Expects Rate Cuts Later This Year

Today, The Bank of Canada held the overnight rate at 5% for the fourth consecutive meeting but provided an outlook suggesting that monetary easing will begin by mid-year. The Bank forecasts a soft landing for the Canadian economy, with inflation falling to 2.5% by the end of this year. While some economists predict a recession, the Bank suggests that “growth will likely remain close to zero through the first quarter of 2024” and “strengthen gradually around the middle of 2024.” This would be a soft landing.

While inflation ended 2023 at 3.4%, owing mainly to high and sticky shelter costs, “the Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.”

The press release says that the “Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour.”  The Bank now believes the economy is in excess supply, inflation expectations and corporate pricing behaviour are moving in the right direction, and wage demands, at 5.4% year-over-year in the last reading–are still too high. Wages are a lagging indicator and with job vacancies returning to pre-pandemic levels, wage pressures are likely to dissipate as the year progresses.

Today, the tone was much more optimistic, suggesting that policymakers are increasingly confident interest rates are restrictive enough to bring inflation back to the 2% target. Still, Bank officials want to see more progress on core inflation before it begins to ease. It said, “The Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.”

The central bank focuses on “the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour” and remains resolute in restoring price stability.

Bottom Line

This was a more upbeat Bank of Canada statement. There is a good chance that monetary tightening has done its job, and inflation will trend downward in the coming months. As we have seen, the road to 2% inflation is bumpy, but we are heading there probably sooner than the Bank expects. As predicted, they are staying the course for now, but multiple rate cuts are likely this year. The scheduled dates for announcing the policy rate are March 6, April 10, June 5 and July 24. The Bank of Canada will begin cutting the overnight rate somewhere in there.

For now, my bet is on the June meeting, but if I’m wrong, it will likely be sooner rather than later. Once they begin to take rates down, they will do so gradually, 25 basis points at a time, and over a series of meetings. We could well see rates fall by 100-to-150 bps this year. Risks to the outlook remain, as always.

I do not expect the overnight policy rate to fall as low as the pre-Covid level of 1.75% this cycle. Inflation averaged less than 2% in the five years before COVID-19, depressed by increasing globalization and technological advances. Those forces are now reversed.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

A Bumpy Road To The Inflation Target

Canada’s headline inflation number for December ’23 moved up three bps to 3.4%, as expected, as gasoline prices didn’t fall as fast as a year ago. These so-called base effects were also evident in the earlier US inflation data for the same month.

Additional acceleration came from airfares, fuel oil, passenger vehicles and rent. Prices for food purchased from stores rose 4.7% yearly in December, matching the increase in November (+4.7%). Moderating the acceleration in the all-items CPI were lower prices for travel tours.

On a monthly basis, the CPI fell 0.3% in December after a 0.1% gain in November. Lower month-over-month price movements for travel tours (-18.2%) and gasoline (-4.4%) contributed to the monthly decline. The CPI rose 0.3% in December on a seasonally adjusted monthly basis.

Two key yearly inflation measures that are tracked closely by the Bank of Canada and filter out components with more volatile price fluctuations — the so-called trim and median core rates — increased, averaging 3.65%, from an upwardly revised 3.55% a month earlier. That’s faster than the 3.35% pace expected by economists. The trim rate rose due to the movements of rent and passenger vehicle prices.

Another important indicator, a three-month moving average of underlying price pressures, rose to an annualized pace of 3.63% in December from 2.94% in November, according to Bloomberg calculations. The Bank of Canada follows this metric closely because it reveals shorter-term inflation trends.

According to Bloomberg News, following the release of today’s CPI data, “the yield on two-year Canadian government bonds rose about four basis points to 3.857%…Traders in overnight swaps pushed back bets on when the Bank of Canada will start cutting rates to July, from as early as April before the release.”

Bottom Line

This is the last major data release before the Bank of Canada meets again on January 24th. I concur with the widely held view that the rate pause will continue at the next meeting despite evidence that the economy is slowing. Governor Tiff Macklem will err on the side of caution before beginning to cut overnight rates. The last reading on wages showed a 5.4% y/y rise, and yesterday’s housing release showed a bump in sales. Macklem and Co. will keep their powder dry until they see an all-clear signal that core inflation is sustainably below 3%.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Canadian Home Sales Surprisingly Strong in December

Statistics released today by the Canadian Real Estate Association (CREA) show national home sales were up noticeably month-over-month in December 2023. The December rise of 8.7% was one of last year’s strongest monthly performances.

The actual (not seasonally adjusted) number of transactions was 3.7% above December 2022, the largest year-over-year gain since August.

On an annual basis, home sales totaled 443,511 units in 2023, a decline of 11.1% from 2022. It was technically the lowest annual level for national sales activity since 2008, although it was very close to levels recorded in each of the five years following the 2008 financial crisis, as well as the first year the uninsured stress test was implemented in 2018.

CREA is forecasting a 10.4% gain in home sales this year, boosted by the expected easing of monetary policy by the Bank of Canada in the second half of 2024.

“While December did offer up a bit of a surprise in sales numbers to cap the year, the real test of the market’s resilience will be in the spring,” said Larry Cerqua, Chair of CREA.

New Listings

The number of newly listed homes dropped by 5.1% month-over-month in December, bringing them to the lowest level since June.

With sales up and new listings down in December, the national sales-to-new listings ratio tightened to 57.8% compared to just 50.5% in November. The long-term average for the national sales-to-new listings ratio is 55%.

There were 3.8 months of inventory on a national basis at the end of December 2023, down notably from 4.2 months at the end of November. The long-term average is five months of inventory.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) declined by 0.8% month-over-month in December 2023. In line with firming market conditions, this measure was smaller than the 1% decrease recorded in November and the 0.9% decline logged in October.

Price declines of late have been predominantly located in Ontario markets, particularly the Greater Golden Horseshoe and, to a lesser extent, British Columbia. Elsewhere in Canada, prices are mostly holding firm or, in some cases (Alberta, New Brunswick, and Newfoundland and Labrador), continuing to climb. As market conditions have recently been evolving, price trends are becoming more of a mixed bag where the regional differences are less clearly defined.

The Aggregate Composite MLS® HPI was up 0.7% on a year-over-year basis in December 2023, up slightly from the 0.6% year-over-year gain in November.

CREA is forecasting modest price increases on a national basis in 2024.

Bottom Line

The Bank of Canada released its Business Outlook Survey today, showing that Canadian businesses experienced a downtrend in sales in the fourth quarter, citing factors including consumer financial stress from high interest rates and inflation. Firms report a muted sales outlook, modest investment intentions and weak hiring plans. There is also concern that upcoming mortgage renewals will further reduce consumer disposable income. The hardest hit were construction and real estate businesses–reporting that some projects have been postponed owing to high financing and construction costs and rising uncertainty.

The report said that consumer-facing firms such as retail, housing and accommodation, food and recreation need help to obtain credit. “This often reflects lenders’ expectations of continued weakening in consumer spending.”

Consumers report increasing uncertainty about the economic outlook, weighing on their spending plans.

Tomorrow, Stats Canada will release the inflation data for December. Economists expect inflation to likely tick up last month, mainly due to base effects. This will only set off alarm bells if underlying price pressures do not ease.

Mounting evidence suggests that growth remained weak in Q4, suggesting the Bank of Canada will begin cutting interest rates by the spring home-selling season.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Brisk Wage Gains in December Will Keep The BoC Watchful

Today’s StatsCanada Labour Force Survey for December was a mixed bag and far more robust than the weak headline figure suggests. Total employment in Canada barely budged, rising by a mere 100 jobs in the final month of last year. However, the labour force participation rate fell, leaving the unemployment rate at 5.8%. Most economists had been expecting considerably more robust job growth and a rising unemployment rate.

Canada has one of the world’s fastest-growing populations owing to high immigration levels. However, employment growth has been slower than labour force growth in recent months.

The employment rate–the proportion of the working-age population with jobs–trended downward in 2023 among core-aged men and women (aged 25 to 54).

The participation rate—the number of employed and unemployed people as a percentage of the population aged 15 and older—fell in December (-0.2 percentage points) to 65.4%. This was down from a recent peak of 65.7% in June. Most of the decline from June to December was attributable to a drop in the youth participation rate, which decreased 2.1 percentage points to 63.5% over the period. On a year-over-year basis, the labour force participation rate fell 3.3 percentage points to 85.4% among youth not attending school. At the same time, it declined 1.0 percentage points to 46.4% among youth who were students (not seasonally adjusted).

The participation rate held steady among those in the core-aged group (88.7%) and people aged 55 years and older (36.9%), compared with June 2023 and December 2022.

Total hours worked rose 0.4% month-over-month in December and 1.7% from a year earlier. That followed a 0.7% month-over-month drop in November.

Employment in professional, scientific and technical services increased by 46,000 (+2.4%) in December, following little change in the three previous months. This was the second monthly increase in the industry in 2023, the first having been a rise of 52,000 in August. On a year-over-year basis, employment in this industry was up by 78,000 (+4.2%) in December.

Following four months of little change, employment in health care and social assistance rose by 16,000 (+0.6%) in December, building on increases in June (+21,000) and July (+25,000). On a year-over-year basis, health care and social assistance employment increased by 124,000 (+4.8%) in December. According to the most recent data from the Job Vacancy and Wage Survey, the job vacancy rate in healthcare and social assistance was 5.3% in October 2023, down from a peak of 6.3% in April but still the highest rate across all sectors.

In December, employment fell in wholesale and retail trade (-21,000; -0.7%) for a third consecutive month. From August to December, work in the industry decreased by 80,000 (-2.7%). This followed gains from December 2022 to August 2023, when employment increased by 108,000 (+3.7%).

Employment rose in British Columbia (+18,000; +0.6%), Nova Scotia (+6,300; +1.3%), Saskatchewan (+4,800; +0.8%), and Newfoundland and Labrador (+2,400; +1.0%) in December, while it declined in Ontario (-48,000; -0.6%). Employment in other provinces was primarily unchanged.

The most concerning thing for the Bank of Canada was the acceleration in wage inflation to 5.4% y/y last month, compared to 4.8% in the prior two months. With Canadian productivity falling, this is particularly troublesome for the overall inflation outlook. For this reason, the Bank of Canada will continue to be cautious.

Bottom Line

The next Bank of Canada confab is on January 24, before which we will see the December inflation data on January 16. Given the mixed labour force survey, particularly the wage spike, the Bank of Canada will remain cautious. They will wait until inflation is sustained meaningfully before 3% before cutting the overnight policy rate for the first time this cycle.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Inflation Held Steady In November

Today’s inflation report was stronger than expected, unchanged from October’s 3.1% pace. While some had forecast a sub-3% reading, the November CPI data posted a welcome slowdown in food and shelter prices. Increases in recreation and clothing offset this–both are discretionary purchases. Cellular services and fuel oil prices declined on a year-over-year basis.

The CPI rose 0.1% from October to November, the same growth rate as in October. The steady pace of annual inflation resulted from the base effects in the energy sector. Gasoline prices fell to a lesser extent month over month in November (-3.5%) than in October (-6.4%). Base effects will also inflate next month’s year-over-year data as well.

Core prices aligned with the headline figures, as the Bank of Canada’s favourite core measures came in at roughly 3.5%. Even excluding food and energy, the core rose 3.5% y/y. The core data were more favourable at three-month trends, posting at about 2.5%.

Bottom Line

Today’s CPI data show why Governor Tiff Macklem is cautious about rate cuts, but judging from the past three months, core inflation is on a downward trend.

In a speech on Friday, Bank of Canada Governor Tiff Macklem said inflation could get “close” to the bank’s 2% target by late next year, though he also said it was “still too early to consider cutting our policy rate.”

The economy is slowing, labour markets have eased, and price pressures are slowing. The road to 2% inflation will be bumpy, but it remains likely that monetary tightening has peaked, and rate cuts will begin by the middle of next year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Housing Markets Prepare For A 2024 Rebound

Before we get into the details of the November housing market data released this morning by the Canadian Real Estate Association (CREA), big positive news for housing occurred yesterday. The US Federal Reserve gave its clearest signal yet that its historic policy tightening campaign is over by projecting more aggressive interest-rate cuts in 2024. This ignited one of the biggest post-meeting rallies in bonds and stocks in recent memory. Global shares spiked higher. Short-term Treasuries posted their best day since March, while world currencies surged against the US dollar and corporate bonds rallied. Canadian markets followed suit. If anything, Canada is far more interest-sensitive than the US, and our economy is far weaker.

As the charts below show, monthly mortgage payments relative to after-tax income are far higher in Canada than in the US, even more so given the tax deductibility of mortgage interest and property taxes south of the border. The US economy grew by a whopping 5.2% in the third quarter compared to a decline of 1.1% in Canada.  Therefore, the Bank of Canada will likely cut interest rates sooner and more aggressively than in the US, improving housing affordability.

The CREA data for November showed a bottoming housing market. Home sales recorded over Canadian MLS® Systems edged down by 0.9% from October to November 2023, the smallest decline since July.

New Listings

Sellers move to the sidelines as well. The number of newly listed homes fell 1.8% month-over-month in November. This followed a 2.2% decline in October.

With new listings down by more than sales in November, the national sales-to-new listings ratio tightened slightly to 49.8% compared to 49.4% in October. It was the first time this measure has increased since April. The long-term average for the national sales-to-new listings ratio is 55.1%.

There were 4.2 months of inventory nationally at the end of November 2023, up only slightly from 4.1 months at the end of October. As such, this measure also looks to be stabilizing and is still almost a full month below its long-term average of nearly five months of inventory.

The second chart below shows that we are definitely in a buyers’ market.

Home Prices

The Aggregate Composite MLS® Home Price Index (HPI) declined by 1.1% month-over-month in November 2023, reflecting softer market conditions since the end of the summer. Prices often react with a slight lag, so it will be interesting to see if month-over-month declines get smaller or stop getting larger in December in response to a stabilizing demand-supply balance.

While price declines remain mainly an Ontario phenomenon, home prices are now softening in the Fraser Valley, Winnipeg, and Halifax. Elsewhere in Canada, prices are mostly holding firm or, in some cases (Alberta, Saskatchewan, New Brunswick, Price Edward Island, Newfoundland and Labrador), continuing to climb. The Aggregate Composite MLS® HPI was up 0.6% on a year-over-year basis.

Bottom Line

The Bank of Canada policymakers will meet again on January 24th. While it will likely be several months before the Bank begins to cut the policy rate, market-driven interest rates have fallen sharply. Fixed mortgage rates have also come down but more moderately. I expect to start easing monetary policy in the spring, taking the overnight rate down by roughly 100 bps by yearend 2024. Housing activity will strengthen in 2024 and 2025, although the economy will be burdened by a substantial rise in monthly mortgage payments as many renewals or refinancings rise, peaking in 2026.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

The Bank of Canada Held Rates Steady and Took A More Neutral Tone

It was widely expected that the Bank of Canada would maintain its key policy rate at 5% for the third consecutive time. It will continue to sell government securities (quantitative tightening) to normalize its balance sheet. Market participants weighed and measured each word of the BoC press release and assessed that the Bank took a less hawkish stance.

This time, the release said, “Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.”

At the prior meeting in late October, the Bank said that the labour market remained “on the tight side” but acknowledged today that it was loosening. Indeed, the October Monetary Policy Report suggested that the inflation rate would not hit its 2% target level until late 2025.

Today, the tone was much more optimistic, suggesting that policymakers are increasingly confident interest rates are restrictive enough to bring inflation back to the 2% target. Still, Bank officials want to see more progress on core inflation before it begins to ease. It said, “The Bank’s preferred measures of core inflation have been around 3½-4%, with the October data coming in towards the lower end of this range.”

The central bank focuses on “the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour” and remains resolute in restoring price stability.

Bottom Line

Bond yields peaked in early October and have fallen by nearly 100 basis points. This has led to reductions in fixed mortgage rates; however, those cuts have been far less than historical experience would have suggested, given the rally in 5-year government bonds.

Cuts in variable mortgage rates await a reduction in the overnight policy rate, which triggers a commensurate decline in the prime rate, which is currently stuck at 7.2%. I expect the BoC to begin cutting the policy rate by the middle of next year, taking it down a full percentage point to 4% by yearend

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Jobless Rates Hits 22-Month High–Led by Losses in Finance and Real Estate Employment

Today’s StatsCanada Labour Force Survey for November was a mixed bag. Total employment gains were stronger than expected. However, the rising unemployment rate and drop in hours worked were signs of mounting economic weakness, especially in the financial and real estate sectors.

Employment in Canada rose by 24.9K in November 2023, following a 17.5K rise in October and above forecasts of 15K. Employment went up in manufacturing (+28K) and construction (+16K). On the other hand, there were declines in wholesale and retail trade (-27K) and finance, insurance, real estate, rental and leasing (-18K). November marks the fourth consecutive month of job gains. Still, the Bank of Canada noted in its October meeting that “recent job gains have been below labour force growth and job vacancies have continued to ease,” suggesting a slowdown in labour demand. The monthly employment gain averaged 39K so far this year, while monthly population growth has averaged 80.8K.

Rapid population growth–driven by Canada’s open-door policy–has boosted economic activity. Despite dramatic tightening by the Bank of Canada, labour markets remain resilient. While yesterday’s GDP release showed a 1.1% decline in growth in the third quarter, housing, government spending and private consumption added to growth. More recent data for Q4 suggest a pick-up in overall activity. Today’s employment data shows stronger-than-expected jobs gains in November.

In other data released last week, Canadian retail sales also surprised on the high side. Consumers splurged in September and October, a surprise resurgence in spending even as high interest rates restrict household budgets. Retail receipts rose 0.8% in October. That’s the biggest jump since April and followed an unexpected 0.6% increase in September, which far exceeded the median estimate of a flat reading in a Bloomberg survey of economists.

The unemployment rate increased for the second consecutive month, continuing its upward trend since April. The unemployment rate rose 0.1 percentage points to 5.8% in November, bringing the cumulative increase since April 2023 to 0.8 percentage points. Compared with a year earlier, unemployed people in November were more likely to have been laid off from their previous job, reflecting more difficult economic and labour market conditions in 2023 compared with 2022.

In construction, employment increased by 16K (+1.0%) in November, building on an increase of 23K (+1.5%) in October. While employment declined in construction through the spring and summer of 2023, gains in October and November brought employment levels to within 15,000 of the peak reached in January 2023. According to the most recent data on building construction, investment in building construction, mainly residential building construction, trended down for most of 2023 before partially rebounding in August and September.

Employment declined by 27K (-0.9%) in wholesale and retail trade in November, adding to a drop of 22K (-0.7%) in October. As of November, employment in the industry was at its lowest since December 2022.

Employment in finance, insurance, real estate, rental and leasing fell by 18K (-1.3%) in November. Since July, employment in this industry has declined by 63K (-4.4%), the steepest decrease of any sector over the period.

Wage growth was steady at +4.8% y/y, still well above what the Bank of Canada targets, given the productivity decline.

On the soft side, hours worked fell 0.7% despite a significant rise in full-time employment. That’s the largest monthly drop since early 2022 and doesn’t bode well for GDP growth in the month after the surprise strength in October’s flash estimate released yesterday.

Bottom Line

Last week, Governor Tiff Macklem said interest rates may be restrictive enough to restore price stability. He added that more downward pressure on inflation is in the pipeline, with the economy expected to remain weak for the next few quarters.

All the relevant data are in now for the Bank of Canada decision next Wednesday, December 6th. The Bank should maintain its pause and suggest that monetary easing may commence in the coming months depending on a continued decline in inflation. Right now, markets are forecasting the first rate cut in April 2024. That would certainly make for a robust spring housing market. I expect a 200 basis point drop in the overnight rate by the end of 2024 to 3.0%. This would imply a commensurate decline in VRMs. Fixed mortgage rates have already begun to drop owing to the sharp decline in mid-term bond yields. An acceleration in the drop in fixed mortgage rates is likely next year, as the spread between FMRs and market yields is still historically high.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres