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?

FOMC announcement: no change and no real hints

As expected, the US Federal Reserve today kept the funds target unchanged at 5.25-5.5 percent, while offering little in the way of guidance as to when any rate cuts might start to happen.  The Fed's view of the current state of the US economy is unchanged:

Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have moderated since early last year but remain strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.

It is impossible to question any part of that summary. Indeed, the startling real growth rate reported for Q4 GDP makes "a solid pace" seem like an understatement.  Job growth continues to surprise to the upside, and the latest CPI data seem to confirm that the last stretch of getting inflation back to the 2 percent target is likely to prove the toughest. 

The uncertainty over inflation is clearly top of mind for the FOMC, which again reminds its audience that it "is strongly committed to returning inflation to its 2 percent objective".  The press release also includes a direct response to the media and market speculation over a possible early start to the easing process:  The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. 

That statement at least suggests they are starting to think about rate reductions, but remain far from being able to give any firm guidance as to timing. Given the state of the economy, it is hard to see why they need to be in any rush to cut.  The likeliest scenario continues to be one in which rates stay at the current level for the first half of this year, with the 75 basis points in reductions suggested by the most recent "dot plot" still in prospect by year-end.  

No recession is no news

At 8:30 EDT this morning, Statistics Canada released data for real GDP for November and, on a preliminary basis, December 2023. Half an hour or so later, I checked the website of the major news outlets to see how they were covering the release.  They pretty much weren't covering it at all, which could only mean one thing: the recession that the media have been baying for since about mid-2022 failed to show up yet again.

If we look at the actual data release, we find that real GDP grew 0.2 percent in the month of November, higher than the preliminary estimate of 0.1 percent,  after remaining virtually unchanged for the three preceding months.  The growth was broad-based, led by the goods-producing sectors, which posted a 0.6 percent month-on-month gain. Thirteen of the twenty sub-sectors tracked by StatsCan saw higher output in the month.  Moreover, StatsCan's preliminary estimate for December suggests that the economy accelerated further in the month, with real GDP posting a 0.3 percent increase.

These monthly numbers are calculated on a slightly different basis from the quarterly data and are of course subject to revision.  Even so, StatsCan feels able to offer an estimate for how the quarterly number for Q4, not due until February 28, is likely to turn out.  It estimates that real GDP grew 0.3 percent in the quarter, which annualizes to around 1.2-1.3 percent.  That would more than offset the 1.1 percent annualized decline reported for Q3. 

Even if these numbers are revised, it is clear that a recession has, yet again, failed to materialize -- indeed, the November and December data would appear to show that the economy is actually starting to move away from such an outcome. A check back with the major news outlets a few hours after the data were released showed they were at least deigning to report the figures, though not in large type and not without adding an editorial comment or two. The Toronto Star's story, for example, is headlined "The Canadian economy grew slightly in November".  In fact, the 0.2 percent gain reported for November annualizes to about 2.5 percent, in line with the economy's long-term potential, and December's 0.3 percent annualizes to a rate close to 4 percent, considerably above potential.  But that wouldn't be newsworthy, would it?

Bank of Canada: "we're getting there"

The Bank of Canada today kept its overnight rate target at 5 percent, in line with unanimous market expectations.  The press release is mostly a listing of factors that are starting to line up for eventual policy easing, followed by a brief  paragraph explaining why it's not yet time to make a move.  The Bank has also published an updated Monetary Policy Report today, and Governor Macklem's introductory remarks give more insight into how the Governing Council is currently thinking.

Let's start with the press release. After an opening paragraph that simply states the Bank's decision, we get two paragraphs on the global growth picture.  Key quotes: "While growth in the United States has been stronger than expected, it is anticipated to slow in 2024".  This is of course key for the Canadian economy and for policymakers, given the overwhelming importance of the US to Canada's external trade sector.  "The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025". It is, of course, important for the Bank not to get its policy cycle too far out of line with the rest of the world, so the expectation that other central banks will soon be in a position to cut certainly makes its job easier. 

We then move on to two paragraphs on the domestic economy.  Key quotes: "the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024....the economy now looks to be operating in modest excess supply.....However, wages are still rising around 4% to 5%". That final quote about wages is the first indication of the Bank's lingering concern that slower growth has not yet created conditions for lower interest rates. "Economic growth is expected to strengthen gradually around the middle of 2024.... Spending by governments contributes materially to growth through the year. Overall, the Bank forecasts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly unchanged from its October projection".  Once again we see the Bank complaining, albeit gently, that relentlessly expansionary fiscal policy is not making its job any easier. 

Finally we get a paragraph on inflation, explaining why it is still too soon to cut, even if the stars are coming into alignment. It's worth quoting the full paragraph:

"CPI inflation ended the year at 3.4%. Shelter costs remain the biggest contributor to above-target inflation. 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". 

Shelter costs are at least partly under the Bank's direct influence because of the role played by mortgage costs, but it is arguable that rapid, immigration-driven population growth is a bigger factor. You might think that the statement that "core measures of inflation are not showing sustained declines" would lead the Bank to question whether the fall in headline CPI might not, in fact, have been brought about by Bank policy moves, and is instead mainly the result of supply chain normalization.  Needless to say, that's not how the Bank sees it. 

The final paragraph spells out what the Bank is looking for in the months ahead. "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".

It's hard to judge from that just how close the Bank is to starting an easing cycle, but Governor Macklem's opening remarks are rather more explicit: 

"...monetary policy is working to relieve price pressures, and we need to stay the course. Inflation is coming down as higher interest rates restrain demand in the economy. But inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work.

...with overall demand in the economy no longer running ahead of supply, Governing Council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level". 

Setting aside the Bank's apparent belief that it can claim all the credit for lower inflation, it's clear that these paragraphs continue the recent trend towards softer rhetoric about the rate outlook.  Monthly GDP data for December, due for release a week from today (i.e. January 31) should give a clearer reading on whether the economy has already slipped into a mild technical recession. If it has (and the guess here is that it hasn't, but it might be very close), calls for early rate cuts are certain to intensify.  The Bank is highly unlikely to respond, but the tone of today's releases suggests the easing cycle may start a bit earlier than previously seemed likely.  Waiting until June still makes good sense, but April can no longer be ruled out.