EconoFACTS

January 26, 2023 | 08:56

BMO Business Activity Index — A Cold December

Economist

Senior Economist and Vice President
Economics

Erik conducts research on financial product market trends, emerging risks and macroeconomic trends for the Bank.... (Read more)

Erik Johnson

Senior Economist and Vice President
Economics

Erik conducts research on financial product market trends, emerging risks and macroeconomic trends for the Bank.... (Read more)

BMO's Canadian Business Activity Index (BAI) suggests that the aggressive rate hikes are starting to weigh on real activity with the index falling 0.3% in December. That ends a string of four consecutive advances dating back to August. Restrictive policy has moved beyond the most interest rate sensitive parts of the economy (housing), with manufacturing sales expected to fall 1.8% in the month according to the flash estimate from StatCan, though volumes should hold up better with industrial product prices reversing lower in December. Wholesale trade is also predicted to drop 1.8% based on the early indicator from StatCan. The slowdown in goods-related sectors will likely continue as the trio of rising inventories, higher borrowing costs, and consumers shifting back toward services are all taking their toll. Accordingly, retail sales may provide one final hurrah for 2022 based on the +0.5% flash estimate, before it likely shifts gears in 2023. As for housing, although December residential sales ticked up, starts fell below 250k units annualized. The expectation that the BoC will keep policy rates elevated for some time will keep activity in the housing market subdued for much of 2023, though the recent decline in longer-term interest rates may provide some support. Moreover, households are still absorbing further financial market volatility, as lower commodity prices put pressure on Canadian equities in December, with the TSX falling about 0.8%.

The still-tight labour market remains the main counterpoint to slowing momentum elsewhere in the economy. The jobless rate fell a tick in December to 5.0%, which is just above the half-century low of 4.9%. With firms across several sectors still reporting labour shortages, there have only been “modest signs of easing” in the labour market according to the BoC. That will likely be the last domino to fall in order for wage growth to slow to a level consistent with the Bank's 2% inflation target.

The Bottom Line: With policy rates now sitting at a restrictive level of 4.5%, economic activity is likely to weaken further and contract modestly in the first half of the year, as the effect of the considerable cumulative rise in interest rates cascades through the economy.

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/