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Recent data shows that the Canadian economy has continued to grow this year, driven primarily by strong consumer demand. While growth is likely to continue, consumer demand is likely to lose momentum, says Leslie Preston, chief economist at TD.
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Greg Bonnell – Why don’t we start with Friday’s GDP report?
Leslie Preston – Yes, well, the Canadian economy rebounded in the first quarter of the year, after a flat performance in the fourth quarter. So that was good news. Growth was still fairly modest, at 1.7% in real terms, driven entirely by the Canadian consumer. Consumer spending rose 3% – generally good growth in the first quarter, but less than the Bank of Canada expected in its latest forecast in its monetary policy report.
Greg Bonnell – When I took a look In the GDP report and some of the details of it, do you expect — it’s been a bounce, not as strong as expected — do you expect that strength to continue? Or is that a bit much to start the year?
Leslie Preston – Well, it’s one of those devil-in-the-details situations because, just like the disappointing 1.7% headline, consumer spending was as strong as expected. There were other outcomes, such as inventory and trade, which affected the headline number. So we expect the situation to be a bit reversing in the second quarter. We think growth will be around 2% in the second quarter, which is a good performance for Canada and stronger than the first quarter. But below that, we expect consumer spending to decline by 3%, and we see a loss of consumer momentum in Canada. So we think strong consumer spending in the first quarter will be a one-hit wonder.
Greg Bonnell – Has it been a bit of a head scratcher up to this point? I think about the American situation. We’re talking about the Canadian situation, where you raise the cost of borrowing to a point that is supposed to slow down the consumer, and then month after month, they’re looking at the details of the data that say, well, the consumer doesn’t feel like they need to slow down.
Leslie Preston – Well, I think overall Canadian consumers as a whole, from a macro perspective, had decent growth in the first quarter. But if you look from an individual and per capita perspective, most Canadians have been cutting back on spending. But what we have is very strong population growth in Canada. This has helped boost the overall numbers. But when we look at the data by household, we certainly see that individual Canadian households have been frugal.
Greg Bonnell – Let’s talk about what we’ve seen in the job market so far and where you think it’s headed.
Leslie Preston – Well, I think – we’ve seen some great jobs numbers in Canada, and I think we all need to adjust our framework of what a good job number is. And because we’ve seen such strong population growth, that’s now showing up in these big gains in employment on a month-over-month basis. But I think what is important is to focus on the unemployment rate in the Labor Force Survey.
So, despite the very strong monthly jobs numbers that people are likely hearing in the media, the unemployment rate is unchanged at 6.1%. So for April – and as you say, we’ll get May data on Friday – it’s been flat in terms of the unemployment rate. But over the past year, we’ve seen the unemployment rate rise by just over one percentage point. So the labor market – I don’t like to say decline – was getting more back into balance because in 2022 when the unemployment rate was at its lowest level after the pandemic, the labor market was very tight. So we saw the unemployment rate rise to 6.1%, which is still below the 20-year average of the unemployment rate in Canada. The job market is still fairly strong, but not as hot or intense as it was in 2022.
Greg Bonnell – Now I know that when we get the jobs data when it comes out every month, I look at the TD Economics report. And it’s not just about the headline number, are we getting jobs? Have we lost jobs? What is the mix? We start talking about working hours. We start talking about wages too. What do we see on this front?
Leslie Preston – Well, we’ve seen some encouraging signs about wage growth. Wage growth is gradually slowing, something the Bank of Canada is looking for, and it again symbolizes a labor market that is returning to balance after being so overheated and emerging immediately from the pandemic.
Greg Bonnell – Well, this brings us to the big question. I mean, that’s what the fight has been about ever since we discovered that the inflationary picture wasn’t fleeting. All these aggressive increases in interest rates, which have been going on for so long to try to bring them back into balance, what are we actually seeing in inflation?
Leslie Preston – Well, we’ve seen inflation fall. In fact, when we look at the Bank of Canada’s core measures that they focus on, it was 2.8% in April. So the Bank of Canada is targeting a range of 1% to 3%. Tiff Macklem– Governor Macklem clarified that he meant 2%, which is the midpoint. But at least we’re in range now. So 2.8% goes down. We expect the inflation rate to approach 2% by the end of this year on an annual basis. But if you narrow the framework to the last three months on an annual basis, inflation will be less than 2%. So we’re fairly confident that the annual metric is moving back around 2%.
Greg Bonnell – I know from reading TD Economics’ work as well – you’ve done some interesting work on this – that there’s been a lot of talk about shelter inflation. And when I took that component out of it, we kind of got to where we needed to be for some time.
Leslie Preston – Yes, and this was a sore point for economists. Shelter inflation is 6.4% year-on-year. Overall, inflation, CPI, was 2.7%. If you removed the shelter-in-place, inflation would not be much higher than 1.2%. The Bank of Canada defended that shelter is a very important cost for all Canadians. They don’t want to strip it completely. But interestingly, their previous core inflation measure was used to exclude mortgage interest costs. So, if you look at that measure, we’re also a lot closer to the 2% inflation rate. So this shelter component is actually what keeps inflation above the Bank of Canada’s target. The Bank of Canada has little room to influence this in the short term.
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