The Consumer Price Index fell 6.9% in September from a year earlier, down from 7% in August and 7.6% in July. Core inflation (excluding food and energy) rose 5.4% over the past year, up from 5.3% in August. Gasoline prices fell, but the cost of groceries continued to rise. The homeowners’ replacement cost index, which is related to the price of new homes, increased 7.7% in September after rising 8.4% in August. Economists generally agree that inflation most likely peaked in July and will continue to decline.
GDP edged up 0.1% in August, following a 0.1% increase in July. Growth in services-producing industries (+0.3%) was partially offset by a decline in goods-producing industries (-0.3%), as 14 of 20 industrial sectors increased in August. The retail trade sector rose 1.2% in August, as 10 of 12 subsectors increased. It was a big rebound from July when output fell back to its December 2021 level. Building material and supplies merchant wholesalers rose 2.6% in August.
The construction sector contracted for the fifth consecutive month, down 0.7% in August as all subsectors recorded decreases. Similar to July, engineering and other construction activities (-0.9%) were the main drivers behind the sector's decline in August, contracting for a second month in a row. Residential building construction was down for the fourth time in five months, shrinking 0.7% in August, in large part due to lower activity in new construction of single-detached homes, row units and apartments. Nevertheless, August activity was more than 8% above the February 2020 pre-pandemic level, although down nearly 14% below the peak recorded in April 2021. Repair construction (-0.4%) contracted for the third time in five months, as both residential and non-residential repair activities were down. Advance information for the third quarter indicates that real GDP increased 0.4%.
BoC Raises Interest Rates Again
The Bank of Canada (BoC) surprised analysts by raising interest rates by 0.5% instead of 0.75%, as had been widely expected. In addition, comments indicated Canada’s central bank’s aggressive war on inflation may be slowing down. Directors agreed further rate hikes will be needed to tame inflation, but the pace may slow. The BoC has raised rates six times this year. Rates now stand at 3.75%. The Boc’s "neutral range" is between two and three per cent. The Bank of Canada slashed its key rate to near-zero at the start the pandemic.
Canadian Economy to Cool Off
The International Monetary Fund (IMF) expects the Canadian economy to continue cooling off and advised the federal and provincial governments to refrain from spending windfall revenues as the country teeters on the edge of recession. IMF expects the Canadian economy to grow 1.5% in 2023, down from a projected 3.3% this year. The economic outlook, however, could be “substantially worse” if inflation remains high and forces the Bank of Canada to keep raising interest rates, or the country’s key trading partners, particularly in the United States, fall into a deeper slump than anticipated, the IMF said.
Interest Rate Forecast
The Organization for Economic Co-operation and Development (OECD) expects the BoC to raise rates to 4.5% in 2023, a higher forecast than many economists who expect the rate to peak at four per cent. The OECD said further policy rate increases are needed in most major advanced economies to reduce inflation and these will likely involve a period of "below-trend growth." Rates are projected to rise to 4.5% to 4.75% in the US, 4.5% in Canada and 4.25% in the U.K. because of the labour market pressures in these countries. The BoC’s current rate is 3.25%. The OECD warned that high inflation is becoming entrenched. Even before the Ukraine war, inflation was pushing above central banks' targets in most G20 countries.
Housing and Construction News
Canada Mortgage and Housing Corp. (CMHC) says the annual pace of housing starts rose 11% in September to 299,589 units, the highest level since November 2021. The increase came as urban and multi-unit starts rose while single-detached urban starts were flat. Rural starts were estimated at a seasonally adjusted annual rate of 23,447. The six-month moving average of the monthly seasonally adjusted annual rates of housing starts was 276,682 in September, up 3% from 267,813 in August.
Home sales fell 3.9% in September compared to August, according to The Canadian Real Estate Association (CREA). Sales were about 10% below the 10-year pre-pandemic average for September. Many owners have decided to wait until spring 2023 in hopes the market may stabilize, so new listings are dropping. September was the seventh consecutive month home sales have fallen.
CMCH says even under best-case scenarios, housing starts will fall well below the affordable housing supply targets it has set for Ontario, B.C. and Quebec to reach by 2030. In those three provinces and Alberta there will only be enough labour capacity over the next eight years to increase the number of housing starts by between 30% and 50% under best-case scenarios. Alberta should not have as much trouble meeting demand. CMCH said they did not think the challenges were as acute as they now appear to be and thinks the government needs to do more to encourage people to return to work.
Housing prices are expected to fall about 2.2% across the board by the end of the year, primarily due to climbing interest rates. Canada is still suffering from significant housing supply shortages.
Retail sales increased 0.7% to $61.8 billion in August. Sales increased in 6 of 11 subsectors, representing 65.0% of retail trade. Core retail sales, which exclude gasoline stations and motor vehicle and parts dealers, increased 0.9%. It was the largest increase in core retail sales in five months. In volume terms, retail sales were up 1.1% in August. Sales were up in six provinces, led by British Columbia. Sales were generally down in the maritime provinces.
Retail Ecommerce Sales Rise 5.7%
On a seasonally adjusted basis, retail ecommerce sales were up 5.7% in August. On an unadjusted basis, retail ecommerce sales were up 8.1% year over year to $3.5 billion in August, accounting for 5.2% of total retail trade. The share of ecommerce sales out of total retail sales was unchanged compared with August 2021.
Canadian Tire, which built their business selling hockey equipment, ended their long-term partnership with Hockey, Canada, saying that the organization has failed to deal with ongoing allegations of sexual assault. Canadian Tire said it will continue to invest in the "beloved national game" by redirecting its funds to sports organizations that "better align" with the company's values. Shaw named Respect Group, co-founded by former professional player Sheldon Kennedy to prevent bullying, abuse, harassment and discrimination, as one of the organizations that will now receive funding.
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