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Recent data shows the Canadian economy has continued to grow this year, driven primarily by robust consumer demand. Leslie Preston, Senior Economist with TD, says while growth is likely to continue, consumer demand is likely to lose momentum.
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Why don't we just start with Friday's GDP report?
Yeah, well, Canada's economy did rebound in the first quarter of the year, off of a flat performance in the fourth quarter. So that was good news. Growth was still fairly modest, 1.7% in real terms, driven entirely by the Canadian consumer. Consumer spending was up a solid 3%-- so decent growth overall in the first quarter, but less than the Bank of Canada had expected in their last forecast in their monetary policy report.
When you took a look at that GDP report and some of the details of it, would you expect-- it was a bounce back, not as firm as expected-- would you expect that strength to continue? Or is that a bit of a one off to start the year?
Well, it's one of these devil's in the details situations because, much like the headline disappointed at 1.7%, consumer spending was strong as expected. And there were other hits, inventory and trade, that weighed on the headline number. So we expect that to be a bit of a reverse situation in the second quarter. We think growth will be around 2% in the second quarter, which is a decent performance for Canada and stronger than Q1. But underneath that, we expect that 3% we saw on consumer spending to come down, that we're seeing a loss of momentum in the consumer in Canada. So we do think that strong consumer spending in the first quarter will be a bit of a one hit wonder.
Has it been a bit of a head scratcher up to this point? I think of the American situation. We're talking about the Canadian situation, where you raise the cost of borrowing to a point that's supposed to slow the consumer down, and then the month after month, they've been looking at these data details that say, well, the consumer doesn't feel like they need to slow down.
Well, I think in aggregate, Canadian consumers as a whole, from a macro perspective, was decent growth in the first quarter. But if you look on an individual and per capita perspective, most Canadians have been cutting back. But what we have is very strong population growth in Canada. So that's been helping to boost the aggregate numbers. But when we look at the data by household, we certainly see that individual Canadian households have been economizing.
Let's talk about what we've seen in the labor market so far and where you think it's headed.
Well, I think-- we've seen some big job numbers in Canada, and I think we all need to adjust our frame for what a good job number is. Because we've had such strong population growth, that's now showing up in these larger month-on-month gains in employment. But I think what's important is to focus on the unemployment rate in the labor force survey.
So despite the very strong monthly job numbers people likely heard quoted in the media, the unemployment rate was unchanged at 6.1%. So for April-- and as you say, we'll get the May data on Friday-- it was steady as she goes in terms of the unemployment rate. But over the past year, we've seen that unemployment rate rise just over a percentage point. So the labor market-- I don't like to say softening-- it's been more coming back into balance because in 2022 when the unemployment rate was at its post-pandemic low, the labor market was very tight. So we've seen the unemployment rate drift up to 6.1%, which is still below the 20-year average on Canada's unemployment rate. It's still a fairly solid labor market, just not as hot or intense as it was back in 2022.
Now I know when we get the jobs data when it comes out every month, I take a look at the TD Economics report. And not only is it about the headline number-- did we gain jobs? Did we lose jobs? What was the mix? We start talking about hours worked. We start talking about wages as well. What are we seeing on that front?
Well, we did see some encouraging signs on wage growth. Wage growth is cooling gradually, which is something the Bank of Canada is looking for and again, is emblematic of a labor market that's coming back into balance from being very overheated coming immediately out of the pandemic.
OK, so that takes us to the big question. I mean, this is what the fight has been about all along since we discovered that the inflationary picture wasn't transitory. All these aggressive rate hikes, holding on for so long to try to bring it back into balance, what are we actually seeing in inflation?
Well, we have seen inflation come down. In fact, when we look at the Bank of Canada's core measures that they focus on, they were 2.8% in April. So the Bank of Canada targets a range of 1% to 3%. Tiff Macklem-- Governor Macklem has clarified he means 2%, the midpoint. But at least we're in the range now. So 2.8%, they're coming down. We expect inflation to get pretty close to 2% by the end of this year on that year-on-year measure. But if you narrow the frame in to the most recent three months annualized, inflation is below 2%. So we're fairly confident that year-on-year measure is cooling towards 2%.
I know from reading the work of TD Economics as well-- you've done some interesting work on this-- that there's been a lot of talk about shelter inflation. And when you take that component out of it, we sort of reached where we needed to be quite some time ago.
Yes, and this has been a sore point with economists. Shelter inflation is at 6.4% year on year. Overall, inflation, CPI is 2.7%. If you strip out shelter, inflation is not much higher than 1.2%. And the Bank of Canada has defended shelter is a very important cost for all Canadians. They don't want to strip it out entirely. But it's interesting that their previous core inflation measure used to strip out mortgage interest costs. So if you look at that measure, we're also a lot closer to 2% inflation. And so this shelter component is really what's keeping inflation above the Bank of Canada's target. And the Bank of Canada doesn't have a lot of room to influence that in the short run. [AUDIO LOGO]
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Why don't we just start with Friday's GDP report?
Yeah, well, Canada's economy did rebound in the first quarter of the year, off of a flat performance in the fourth quarter. So that was good news. Growth was still fairly modest, 1.7% in real terms, driven entirely by the Canadian consumer. Consumer spending was up a solid 3%-- so decent growth overall in the first quarter, but less than the Bank of Canada had expected in their last forecast in their monetary policy report.
When you took a look at that GDP report and some of the details of it, would you expect-- it was a bounce back, not as firm as expected-- would you expect that strength to continue? Or is that a bit of a one off to start the year?
Well, it's one of these devil's in the details situations because, much like the headline disappointed at 1.7%, consumer spending was strong as expected. And there were other hits, inventory and trade, that weighed on the headline number. So we expect that to be a bit of a reverse situation in the second quarter. We think growth will be around 2% in the second quarter, which is a decent performance for Canada and stronger than Q1. But underneath that, we expect that 3% we saw on consumer spending to come down, that we're seeing a loss of momentum in the consumer in Canada. So we do think that strong consumer spending in the first quarter will be a bit of a one hit wonder.
Has it been a bit of a head scratcher up to this point? I think of the American situation. We're talking about the Canadian situation, where you raise the cost of borrowing to a point that's supposed to slow the consumer down, and then the month after month, they've been looking at these data details that say, well, the consumer doesn't feel like they need to slow down.
Well, I think in aggregate, Canadian consumers as a whole, from a macro perspective, was decent growth in the first quarter. But if you look on an individual and per capita perspective, most Canadians have been cutting back. But what we have is very strong population growth in Canada. So that's been helping to boost the aggregate numbers. But when we look at the data by household, we certainly see that individual Canadian households have been economizing.
Let's talk about what we've seen in the labor market so far and where you think it's headed.
Well, I think-- we've seen some big job numbers in Canada, and I think we all need to adjust our frame for what a good job number is. Because we've had such strong population growth, that's now showing up in these larger month-on-month gains in employment. But I think what's important is to focus on the unemployment rate in the labor force survey.
So despite the very strong monthly job numbers people likely heard quoted in the media, the unemployment rate was unchanged at 6.1%. So for April-- and as you say, we'll get the May data on Friday-- it was steady as she goes in terms of the unemployment rate. But over the past year, we've seen that unemployment rate rise just over a percentage point. So the labor market-- I don't like to say softening-- it's been more coming back into balance because in 2022 when the unemployment rate was at its post-pandemic low, the labor market was very tight. So we've seen the unemployment rate drift up to 6.1%, which is still below the 20-year average on Canada's unemployment rate. It's still a fairly solid labor market, just not as hot or intense as it was back in 2022.
Now I know when we get the jobs data when it comes out every month, I take a look at the TD Economics report. And not only is it about the headline number-- did we gain jobs? Did we lose jobs? What was the mix? We start talking about hours worked. We start talking about wages as well. What are we seeing on that front?
Well, we did see some encouraging signs on wage growth. Wage growth is cooling gradually, which is something the Bank of Canada is looking for and again, is emblematic of a labor market that's coming back into balance from being very overheated coming immediately out of the pandemic.
OK, so that takes us to the big question. I mean, this is what the fight has been about all along since we discovered that the inflationary picture wasn't transitory. All these aggressive rate hikes, holding on for so long to try to bring it back into balance, what are we actually seeing in inflation?
Well, we have seen inflation come down. In fact, when we look at the Bank of Canada's core measures that they focus on, they were 2.8% in April. So the Bank of Canada targets a range of 1% to 3%. Tiff Macklem-- Governor Macklem has clarified he means 2%, the midpoint. But at least we're in the range now. So 2.8%, they're coming down. We expect inflation to get pretty close to 2% by the end of this year on that year-on-year measure. But if you narrow the frame in to the most recent three months annualized, inflation is below 2%. So we're fairly confident that year-on-year measure is cooling towards 2%.
I know from reading the work of TD Economics as well-- you've done some interesting work on this-- that there's been a lot of talk about shelter inflation. And when you take that component out of it, we sort of reached where we needed to be quite some time ago.
Yes, and this has been a sore point with economists. Shelter inflation is at 6.4% year on year. Overall, inflation, CPI is 2.7%. If you strip out shelter, inflation is not much higher than 1.2%. And the Bank of Canada has defended shelter is a very important cost for all Canadians. They don't want to strip it out entirely. But it's interesting that their previous core inflation measure used to strip out mortgage interest costs. So if you look at that measure, we're also a lot closer to 2% inflation. And so this shelter component is really what's keeping inflation above the Bank of Canada's target. And the Bank of Canada doesn't have a lot of room to influence that in the short run. [AUDIO LOGO]
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