Result of the week: Bank of Canada reiterates its flexible approach


Highlights of the United States

  • October retail sales rose 1.7% better than expected for the month. Sales of volatile categories rose sharply, but sales of the control group also rose 1.6%. Leading the charge on this front was a 4% gain in non-store sales.
  • Housing starts fell 0.7% in October, as starts in the single-family home segment fell for the fourth consecutive month. The improvement in sentiment among homebuilders over the past few months indicates that this sector may also soon take a positive turn.
  • President Biden signs the Infrastructure Investment and Jobs Act (IIJA). The legislation will channel $ 550 billion in new spending on transportation and other critical infrastructure over the next few years. In addition, the largest Social Spending and Climate Build Back Better (BBB) ​​bill has cleared the House and is heading to the Senate.

Canadian Highlights

  • CPI inflation rose again in October (to 4.7% per year). Energy continued to act as a major tailwind, but the release showed widespread pricing pressures across different spending categories. At the same time, retail sales fell 0.6% in September. However, Statistics Canada’s advanced estimate indicated a rebound of 1% in October.
  • This week’s busy schedule was complemented by communications from Bank of Canada officials. For example, in a written article, Governor Macklem emphasized the central bank’s continued flexible approach and willingness to adjust its policy to changing economic data.

United States – Infections on the rise as the holidays approach

Last week’s hot inflation report raised a lot of eyebrows, but this third week of November has been more balanced on the data front. Retail sales grew 1.7% month-on-month (m / m) better than expected in October. Sales in volatile categories – gas stations (+ 3.9%), building materials (2.8%) and automobiles (1.8%) – rose sharply. Receipts in restaurant bars, meanwhile, remained stable over the month. Sales in the remaining subsectors, known as the “control group”, did not disappoint, posting a solid 1.6% increase. While most categories saw improvement, non-store retailers (a good indicator of online sales) led the charge, up 4%.

The good gain in the control group as well as the increase in auto sales in October indicate a good start to spending on goods in the fourth quarter. Scratching beneath the surface, however, reveals a more nuanced backdrop. The increase in sales appears to reflect some recovery in activity from the busy holiday season. Consumers have been constantly warned of supply chain issues and possible shortages and many appear to have started their holiday shopping early. A recent survey showed that about half of holiday shoppers plan to start shopping before November. The strength of non-store retail sales, a very popular holiday shopping channel, adds credence to this view. While overall spending is expected to remain healthy, it could slow as the end of the year approaches, reflecting this forward trend. The rise in new COVID-19 infections poses an additional risk to consumption growth, as it could further delay the expected shift from spending to services (Figure 1).

Tipping into the housing market, residential construction activity continued to falter in October, with housing starts down 0.7% over the month. Given the myriad of hurdles that builders face, such as supply chain disruptions, higher material costs, and a shortage of workers and usable land, it’s no surprise that construction housing has slowed down a bit in recent months. Housing starts in the larger single-family home segment have been the main contributor to the recent downtrend. A recent and steady improvement in homebuilder confidence indicates that this sector should take a positive turn in the near term (graph 2). While the upcoming removal of monetary stimulus will hamper housing demand in the coming quarters as it weighs on already strained affordability, housing construction activity is expected to remain well supported given the stock of housing stock. exceptionally low accommodation.

The other big developments this week have been on the political front, as President Biden enacted the Infrastructure Investment and Jobs Act (IIJA). The legislation will channel $ 550 billion in new spending on transportation and other critical infrastructure. This type of spending tends to have high economic multipliers, resulting in a greater economic impact than the initial dollar amount spent. And, by increasing the stock of productive capital, it may even increase the potential growth rate of the US economy. However, given that investments are spread over several years and such projects take time to implement, the boost to the economy will likely be modest and take time to be felt. In contrast, higher social spending of $ 2 trillion and the climate bill, which passed the House at the end of the week, would provide a more visible short-term boost to growth in 2022. This package, however, faces a divided Senate and is still far from being concluded.

Canada – Bank of Canada reiterates flexible approach

Canada’s economic recovery has been choppy in recent months, but as we look to 2022, above-trend growth is still in the cards. This expectation is based in large part on the continued strong rebound in consumer spending, further supported by the improvement in the labor market environment and a significant accumulation of excess savings. But this view is not without downside risks, and one of them is the acceleration of the rise in consumer prices since the start of the summer.

October inflation was the highlight of the data release (Chart 1) this week. Price growth increased further, increasing 4.7% year-on-year. Unsurprisingly, energy continued to provide a key tailwind, up 25.5% significantly over the year. But pricing pressures have been seen elsewhere, including a pick-up in spending categories that had previously experienced moderate price growth (i.e. clothing). At the same time, inflation for housing (4.8%) and food (3.9%), the two categories with the highest basket weights, remained high and changed little compared to the last month. The monthly dynamic, although down compared to the previous month, remained high (+ 0.5% m / m). By all accounts, inflation in Canada continues to soar.

Regarding consumer spending, Friday’s retail sales press release revealed a 0.6% drop in September, compounded by a larger drop in volumes (-1.1%). Motor vehicles (-1.6%) were a major contributor to the overall weakness. Activity in this category has been hampered by persistent supply chain disruptions. Still, the report was unambiguous, with declines spanning seven of 11 industries. On the bright side, however, is that Statistics Canada’s flash estimate predicted a good rebound in October (+ 1%, graph 2).

The potential interaction between inflation and consumer spending will be one of the main themes to watch in 2022. If price pressures continue to accelerate, economic growth could suffer from erosion of real wages and the purchasing power of consumers. Uncertainty remains high, especially on the supply side of the economy, suggesting that these risks should not be minimized. In our baseline scenario, we forecast a gradual slowdown in inflation through 2022. However, continued labor market gains and a gradual withdrawal of additional household savings are supporting strong consumption growth for the period. ‘year. The Bank of Canada presented a similar story in its October Monetary Policy Report. However, recognizing the risks posed by inflation, the central bank was among the first to advance its forecast for interest rate hikes and end its quantitative easing program. Nonetheless, the Bank understands the high uncertainty surrounding the outlook. Bank of Canada Governor Tiff Macklem in an article published this week highlighted the uncertainty presented by the unusual shock to the economy and, in turn, the central bank’s willingness to change positions if the data was evolving contrary to expectations.


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