Yes, we have no recession

Canada's GDP data for the final quarter of 2023 were released this morning, but you'd need to search the media pretty carefully to find out about it. That can only mean one thing, right? If you scroll WAAAY down into the CBC website, you will eventually find an article with this headline: "Canadian economy not in recession, but 2023 was one of its weakest recent years".  You can almost hear the editor yelling at the reporter when the data appeared -- "for Pete's sake find me something negative to say about this!" Luckily for the reporter, he/she did not have to look any further than the second paragraph of the data release to come up with that headline. 

If we look at that data release, we find that the economy grew 0.2 percent in Q4/2023, or just under 1.0 percent at an annualized rate, more than fully reversing the decline of 0.1 percent (0.5 percent annualized) reported in the prior quarter. Growth in Q4 largely reflected strength in external trade, with household spending also higher.  However, this was offset by weakness in investment, both business and housing, which is scarcely surprising with interest rates still at their highs for the current cycle.

In no way can this be considered a strong report, but yet again the economy has defied the strenuous efforts of the media to talk it into a recession. However, even as aggregate GDP continues to inch ahead, there is a story to be told about per capita GDP.  Canada's population expanded more than 2 percent in 2023 on the back of record-high immigration, so GDP per person is already declining.  With little likelihood of either significantly faster GDP growth or significantly lower population growth any time soon, that negative trend is set to continue. This is sure to be a major issue in the Federal election that is now probably no more than a year away.

As usual, StatsCan also released data on monthly GDP by industry alongside the quarterly numbers. Real GDP was unchanged in December from the previous month, with declines in goods-producing sectors offset by gains in services output. Two special factors may have pushed the aggregate figure for December lower: a public sector strike in Quebec, and unseasonably mild weather across much of the country, which reduced utilities output.  Interestingly, StatsCan's preliminary estimate for January suggests a healthy 0.4 percent gain in real GDP for the month, led by a strong gain in services output.

With today's report, the Bank of Canada now has all the key economic information it will use in making its next rate decision on March 6.  Even though inflation edged into the top half of the Bank's target range in January, there has been almost no market speculation about a rate cut at this session.  The GDP data do not change that in any way: with the economy still moving ahead, the Bank can afford to wait a little longer, in order to be sure that inflation can be brought sustainably back to its 2 percent goal.  

Within range

Remember when Canada's CPI data for December were released in mid-January?  The headline rate ticked up to 3.4 percent year-on-year, prompting hand-wringing in the media (and even, it should be said, by some professional economists who should have known better) on the basis that the data would prompt the Bank of Canada to delay interest rate cuts. The number was almost universally blamed on "higher gasoline prices", even though gas prices actually fell in the month; the real cause was a calculation anomaly related to the so-called "base effect", but it seems almost nobody could actually be bothered to figure that out. 

So, with past as prologue, today saw the release by StatsCan of CPI data for January.  On the surface the numbers look like good news: year-on-year headline CPI fell more than expected, dropping to 2.9 percent, just barely within the Bank of Canada's 1 - 3 percent target range.  And below the surface?  Well, guess what, that's mostly good news too.

Gasoline prices were once again a big part of the story, standing 4.0 percent lower than a year ago.  However, CPI excluding gasoline also slowed noticeably in the month, falling to 3.2 percent year-on-year from December's 3.5 percent reading.  Other special aggregates also showed a promising trend. Prices for food purchased from stores slowed to 3.4 percent from December's 4.7 percent.  CPI excluding food fell 0.1 percent in the month, dropping the yearly rate to 2.7 percent. The fastest-rising sub-component of the index continues to be shelter, which rose 6.2 percent from a year ago, but the month-on-month increase was a rather more modest 0.3 percent.

All three of the Bank of Canada's preferred measures of core inflation eased in the month.  Their mean value now stands at just below 3.4 percent, 0.3 percent lower than in December and markedly below the peak of near 5 percent seen early in 2023. 

This all looks very positive for the Bank of Canada, though it hardly warrants the renewed speculation in the media about early rate cuts: June still looks like the best bet for that.  And there is, as always, a possible fly in the ointment.  Gasoline prices have moved sharply higher in February, mainly courtesy of the Houthis. That could well mean that headline CPI ticks back above 3 percent for the month, no doubt triggering a fresh round of media angst, which can of course be safely ignored.

About those rate cuts....

The strong jobs data reported in Canada this morning -- strong at the headline level, at least -- seem likely to quell expectations that the Bank of Canada will make an early start on reversing its recent rate hikes. At the same time, there are plenty of issues behind the headline figure for the Bank to think about as it contemplates its future policy moves. 

According to Statistics Canada, employment rose by 37,000 in January, after being little changed over the three preceding months. As a result the unemployment rate, which had been rising gently through 2023 as a result of rapid growth in the population and the labour force, ticked down to 5.7 percent.  The year-on-year gain in wages edged down marginally from the previous month to stand at 5.3 percent, still too high for the Bank's comfort as it seeks to bring CPI back to the 2 percent target. 

On the face of it, today's numbers are incompatible both with the idea that the economy is on the brink of recession and with the belief that rate cuts must start soon. However, a look behind the headline numbers creates a somewhat more nuanced picture.  Most notably, full-time employment actually fell by almost 12,000 in the month, with the headline gain entirely the result of a rise of almost 49,000 in part-time positions.  Given the volatility of the monthly data, it is important not to read too much into this: over the past year, the economy has added 227,000 full-time jobs, as against 119,000 part-time.  Moreover, total hours worked rose 0.6 percent from the previous month, despite the preponderance of new part-time jobs. 

Despite the slight fall in the unemployment rate, it remains unclear that the economy can create jobs at a sufficient pace to keep up with population growth. Over the past twelve months,  the impressive gain of 345,000 new jobs is dwarfed by both the increase in population (just over 1,000,000) and the increase in the labour force (515,000).  The data for January are frankly puzzling: population surged by a further 125,000, but the labour force rose by only 18,000.  It seems certain that many more of the immigrants will soon enter the labour force, which will again start to exert upward pressure on the unemployment rate.  

Much for the Bank of Canada's policymakers to consider there, though there is enough strength in the data to give them time to think carefully about their next move.  And one other consideration may be coming back into play.  According to this article, the housing market in Toronto, by far the largest in Canada, is "roaring back to life", apparently partly driven by buyers anticipating the imminent arrival of lower interest rates.  Not what the Bank wants to see, and further evidence that the smart policy choice would be to wait until mid-year before starting to cut rates. 

The jobs keep coming

That darn struggling US economy just can't seem to stop creating jobs. Data this morning from the Bureau of Labor Statistics show that 353,000 new jobs were added in January, far ahead of expectations.  What's more, the initially-reported data for the two preceding months were revised higher by a total of 126,000. The unemployment rate held steady at 3.7 percent for the third month in a row. 

There can be no real doubt that Fed Chair Jay Powell had some advance knowledge of the data ahead of this week's FOMC meeting, so it is no surprise that he used his press conference to pour cold water on the notion that rate cuts could start as early as March. Looking beyond the headline figure, there is another element in today's release that serves to push rate cut expectations further into the future. Average hourly earnings rose sharply in January, up 0.6 from December, pushing the year-on-year increase to 4.5 percent from 4.1 percent previously.  This is clearly not compatible with the FOMC's wish to see inflation moving "sustainably" towards 2 percent before it contemplates rate cuts. 

Indeed, with the economy growing strongly and creating so many new jobs, why would the FOMC even consider risking an early rate cut, which could backfire by rekindling inflation expectations?  The economy clearly ain't broke, so there is little need to try to fix it. There are even signs that the US public is starting to take a somewhat less jaundiced view of the state of the economy, to which one can only say, what took you so long?