Michael Watkins
September 29, 2023
Weekly Market Update
A little green on the screen yesterday to help offset a fairly volatile start to Fall. In economic news, GDP came in flat today for July, with indicators pointing to a modest uptick in August. All of which tells us that the interest rate hikes are doing their job in slowing the economy.
Canada’s labour market also appears to be losing some steam. The labour market has been a source of strength after the pandemic, with the Canadian economy adding jobs and the unemployment rate falling to historically low levels. But recent data shows increasing unemployment benefits, job losses and a rising unemployment rate.
- Statistics Canada announced the number of employment insurance (EI) beneficiaries rose by 6.0% in July. July’s increase was the third straight month of rising EI beneficiaries and the largest monthly increase since May 2021.
- EI benefits have increased alongside Canada’s unemployment rate. The unemployment rate reached 5.5% in August, up from 5.0% in April. The economy lost jobs in May and July while adding jobs in April, June and August.
- Canada’s labour market remains strong, despite the pullback in recent months. The labour market has been robust since the early stages of the pandemic, which has strengthened Canadian consumers and helped lift spending.
- At its last meeting, the Bank of Canada (BoC) noted that the labour market is easing, which was considered in its decision to hold interest rates steady. But the BoC might not be done, particularly with inflation proving relatively sticky.
An easing labour market, muted economic growth in the second quarter and softening demand amid tight financial conditions point to a weaker Canadian economy. The depth of the decline is uncertain, but the BoC is trying to carefully orchestrate its monetary policy to ensure a soft landing for Canada’s economy.
Looking south of the border, consumer spending in the US helped fuel economic growth after the pandemic. But surging inflation and aggressive rate hikes by the US Federal Reserve Board, which have made financial conditions relatively tight, could begin to catch up with US consumers in the next few quarters.
- US consumer spending expected to slow by the first quarter of 2024. While US consumers have proven to be relatively resilient, Fitch Ratings agency believes a slowing labour market, easing wage growth and rising borrowing costs may begin to hinder consumer spending.
- Savings built up during the pandemic are beginning to deplete. Fitch estimates consumers spent approximately 80% of their savings over the last few years, which helped boost economic growth. However, it predicts that in the months ahead a larger percentage of consumer spending will be used to manage debt, which has grown sharply over the last year.
- US economy predicted to contract. The US economy expanded by 2.1% in the second quarter of 2023. But as consumer spending is a critical driver of growth in the US, its easing is predicted to lower US economic growth rates.
A slump in consumer spending in the US will likely have a negative impact on the health of the global economy, including Canada. This could impact Canada’s exports to the US and US travel to Canada, which would affect several sectors, including hotels, restaurants and other services.
As always, please give us a call if you have any questions, or if you’d like to get together for a portfolio review.
Source: CIBC Morning Market Brief