August 29, 2022 | 10:11
BMO Business Activity Index — Taking Away the Punch Bowl
BMO's Canadian Business Activity Index (BAI) suggests that the economy went in reverse to start the third quarter, falling 0.4%. That comes after a 0.3% advance in June to end a sturdy second quarter. The slowdown in activity was broad-based, with all ten sub-indicators weakening in July. The most abrupt changes over the past few months have been the erosion of small business confidence and the sudden slowing of the housing market. The former is now testing levels similar to the early months of the pandemic. Rising input costs and staffing shortages are challenging cash flows and limiting growth potential. Meanwhile, surging interest rates have quickly changed the psychology in the housing market, as affordability and carrying costs have pushed many would-be buyers to the sidelines. Residential home sales have now fallen for five consecutive months and prices are in full retreat. The counterbalance to these sluggish trends has been the strong labour market, but even there, July featured a pullback in hours and employment. We also expect wholesale, retail, and manufacturing volumes to weaken given the StatCan flash estimates all pointing to declining nominal sales.
Still, there are some upsides for activity in the month. For one, services consumption has been strong and real-time indicators suggest that is likely to continue at least in the near term. Seated diners (according to OpenTable) averaged 15% above 2019 levels in July and have trended even higher so far in August. Excluding gasoline purchases, external data suggests July consumer spending was stronger than in June. Similarly, after testing year-to-date losses in excess of 13% by mid-July, the TSX has since rebounded to cut those losses in half. A big drop in producer prices in July also suggests that we could see a positive surprise on manufacturing volumes when they're released next month.
The Bottom Line: The Canadian economy is sending early signs of slowing as rising interest rates and inflation start to take a bite out of real spending. The latter months of the summer are likely to show further weakness, despite some gas still left in the tank from the rotation back to in-person services and pent-up savings.
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/