Thoughts

June 23, 2023 | 11:48

Canadian Economy Remains Resilient

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Another week has passed, and the beat goes on with another strong run of Canadian data. This time it was retail sales, with April spending climbing 1.1%. Most of that gain was due to higher prices, as volumes were up a modest 0.3%, but it doesn’t change the fact that consumers appear to be more than willing to spend, spend, spend! The flash estimate for May retail activity increased as well, so the positive omentum continued.

Canadian consumer resilience was highlighted by the Bank of Canada in the Summary of Deliberations from the June 7 meeting. Q1 GDP growth came in above the BoC’s forecast, driven by a 5.7% annualized surge in household consumption. Policymakers discussed a few potential drivers of that strength: 1) the lagged effect of rate hikes; 2) pent-up demand; 3) excess savings and a tight labour market; and, 4) population growth. The first three factors are a reasonable rationale to continue with rate hikes, while strong population growth isn’t likely to be impacted much by higher rates.

A related point of resilience noted in the minutes was the rebound in the housing market. Home sales turned higher after the BoC’s January pause signal, and prices have followed suit in the past couple of months despite mortgage rates rising substantially over the past year. As my colleagues Doug Porter and Robert Kavcic have rightfully stated a number of times: If the most interest rate sensitive part of the economy isn’t buckling under the pressure of higher rates, then policy rates likely aren’t high enough.

We’ll get a few important reports on the Canadian economy in the week ahead. May’s CPI report, out Tuesday, should look encouraging on the surface, with a big deceleration in headline annual inflation, due in no small part to base effects (prices were up big in May 2022). However, the picture on the core metrics is expected to be much less favourable, supporting the case for further BoC tightening. Indeed, the minutes expressed concern that the 3-month rates for core inflation rose in April. We anticipate another acceleration in May. We’ll also get April GDP and the BoC’s Business Outlook Survey late in the week. Growth is expected to stay relatively robust, especially considering the dampening impact of April’s public sector strike. Meanwhile, sentiment looks to remain on the soft side with higher rates and inflation weighing on the outlook.

Key Takeaway: Resilience was the theme this week, and something BoC policymakers keyed on to drive the June 7 decision to hike rates. We get another set of top-tier data next week, none of which are expected to change the outlook for another 25 bp hike at the next policy meeting on July 12.