November 28, 2023 | 10:11
BMO Business Activity Index — Autumn Chill
After treading water in the third quarter, the Canadian economy appears to be dipping below the surface to start the final quarter of the year. BMO's Canadian Business Activity Index (BAI). dropped 0.5% in October, the most since spring 2021, after a milder 0.1% dip in September.
The underlying details don’t offer much in the way of optimism either, especially against the backdrop of some of the fastest population growth the country has seen in several decades. Both wholesale trade (-1.1% early indicator from StatCan) and manufacturing sales (-2.7% flash) are expected to weigh on activity in October. While lower producer prices—they fell 1.1% (s.a.) in October—will support volumes, underlying business sales appear meagre. After being on fire for most of the past couple of years, the labour market is also showing clear signs of slowing with the unemployment rate ticking up 0.2 ppts in October to 5.7%. As with home building, the job market is also struggling to keep up with Canada’s surging population. For those looking for green shoots, on the surface both the expected uptick in October retail sales (+0.8% flash) and housing starts (+1.6%) seem to offer some good news. But even there, the details point to a difficult backdrop for activity in the months ahead. Auto and gasoline sales have lifted headline retail sales, while core sales slipped 0.3% in September and will likely struggle again in October. Torrid population growth is propping up residential construction, but building permit activity for new residential units remains down more than 10% compared to a year ago, suggesting that the pipeline is eventually going to slow.
Real-time indicators for the Canadian economy reinforce the view that underlying activity is weakening. Despite the uptick in headline retail sales, slower consumer spending is weighing on railcar traffic, as intermodal activity is down more than 8% y/y (4-week moving average) through November 18. StatCan's Real-time Local Business Conditions Index suggests that most major cities have seen limited changes in activity since the end of the summer.
The Bottom Line: With high interest rates weighing on spending plans for both households and businesses, the Canadian economy is likely headed for a mild contraction to finish the year.
Endnote: BMO’s Canadian Business Activity Index is compiled from ten monthly indicators, with supporting information from Statistics Canada’s preliminary estimates of some indicators, as well as high-frequency data on retail mobility and internal credit card transactions. For more details see, https://economics.bmo.com/en/publications/detail/82f74b6c-fabf-4733-b4d4-33c50adf0d3b/