September 27, 2023 | 13:30
BMO Business Activity Index — A Brief Respite
The Canadian economy appears to have bounced back after a mild contraction in the second quarter, according to BMO's Canadian Business Activity Index (BAI). The BAI rose 0.4% in August, after jumping 0.5% in July. That highlights that some momentum has built up through the third quarter after wildfires and public sector strikes weighed on the past quarter.
The underlying details, however, suggest that what little momentum had been building up is likely to fade by the end of the year. The construction-side of the housing sector has been surprisingly resilient, with housing starts rebounding to around 250k units annualized from their May dip to 200k. But, with policy rates likely to remain at 5.0% until mid-2024, getting the arithmetic to work on new housing projects will prove challenging. That same math is curbing demand for existing homes, as many borrowers now have to qualify at over 8% under the stress test. Despite the uptick in the unemployment rate to 5.5% in August, the labour market remains sturdy as hours worked jumped 0.5%. Surging population growth—it reached nearly 3% y/y or more than 1.1 million people in the second quarter—is providing significant support to the aggregate economy (per capita figures are much weaker) and will help sustain demand across a number of sectors over the medium run (housing in particular). Alberta offers a glimpse of that future, where population growth is running at 4.1% y/y, and higher oil prices are helping to support one of the few resurgent housing markets in Canada.
Goods sectors have had a mixed performance so far this quarter. Consumer spending is coming under pressure, as retail sales are poised to slip in August based on StatCan's -0.3% flash estimate. Volumes are likely to run even weaker given the 1.3% m/m gain in goods inflation. On the other hand, manufacturing shipments (+1.0% flash) and wholesale trade (+2.6% early indicator) continue to benefit from the normalization of motor vehicle production. The rebound in oil prices is also lifting producer prices, which jumped 1.3% in August (seasonally adjusted), and will put downward pressure on both manufacturing and wholesale volumes. Nearly two weeks into the UAW strike there are further risks that Canadian motor vehicle production could be disrupted even if Unifor reaches agreements with GM and Stellantis.
Real-time indicators for the Canadian economy reinforce the view that underlying activity is slowing. Slimmer consumer goods volumes are weighing on railcar traffic, as intermodal activity is down more than 11% y/y (4-week moving average) through September 23. StatCan's Real-time Local Business Conditions Index also underscores the regional differences in activity across the country, with Calgary and Alberta outpacing the likes of Toronto and Montreal.
The Bottom Line: The Canadian economy is likely to see a fleeting improvement over the wildfire-affected second quarter, but the underlying momentum is weakening, consistent with our call for a mild contraction at the end of 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/