It’s been another volatile week in the markets. But this is actually a good sign, as it’s a reflection of our slowing economy; which is exactly what we need to get inflation down where we want it to be.

Canada’s annual inflation rate slowed in September for the first time since June. Inflation has trended downward in 2023, but the last few months have seen it tick higher amid a slowdown in the drop in oil prices. The Bank of Canada’s (BoC) extensive rate hikes since the beginning of 2022 appear to be helping pull inflation down.

• Canada’s inflation rate was 3.8% year-over-year in September, down from the 4.0% rate in August. Canada’s core inflation rate, which excludes more volatile items such as energy and food, also softened in September.
• Moderating growth in food prices contributed to September’s slowdown. Still, food prices rose by 5.9% year-over-year. Higher grocery prices are having a significant impact on many Canadian households. Meanwhile, prices fell for household operations.
• Conversely, gasoline prices surged higher year-over-year in September, rising by 7.5% compared to a 0.8% increase in August. Oil price growth faded early in 2022, but prices have increased in recent months.
• Now that September’s inflation report is out, attention will turn to the BoC, which makes its next interest-rate announcement on October 26. This report, and stalling economic growth, might have the BoC keeping its benchmark overnight interest rate steady at 5.00%.

While inflation has trended down this year, it remains above the BoC’s 2% target. In response, the BoC has stated its willingness to raise interest rates more if needed.

According to the Bank of Canada (BoC), sentiment among businesses in Canada is falling. Its third-quarter Business Outlook Survey showed high inflation and rising interest rates are weighing on demand, hurting business conditions. The report highlights the uncertainty of the economic environment right now here in Canada.

• The BoC Business Outlook Survey dropped to -3.5 in the third quarter from -2.2 in the second quarter. The third-quarter reading was the lowest since 2009, outside of the sharp drop amid the COVID-19 pandemic in 2020.
• Businesses indicated that interest-rate increases from the BoC are beginning to weigh on business conditions. Sales have been relatively muted, which has helped lower businesses’ hiring intentions and plans for capital investments.
• Businesses expect inflation to remain above the BoC’s target for the next three years while acknowledging inflation has come down. Still, higher prices are negatively impacting the business environment.
• The BoC also surveyed Canadian consumers, who expressed high prices as their biggest concern. In response, major purchases are likely to decline, particularly those that are typically financed by a loan, such as automobiles.
• The BoC makes its next interest-rate announcement on October 25. While current signals point to the BoC holding steady, the BoC has indicated it would be willing to lift interest rates further if inflation continues to run well above its target.

Weaker sentiment among Canadian households and businesses is hindering spending plans, negatively impacting the overall health of Canada’s economy. When economic conditions weaken, Canadian financial markets might see some volatility. Still, look past the short-term negatives. The Canadian economy and financial markets have proven resilient over the long term.

In global news, China’s economy expanded over the third quarter of 2023, with underlying data showing the economy might be building some momentum. China’s economy has struggled amid a weak property market, lower trade activity and ongoing lockdowns. However, lockdown restrictions have been removed and the People’s Bank of China (PBOC) has taken action to help support the economy.

• China’s economy expanded by 4.9% year-over-year in the third quarter of 2023, above the 4.5% growth expected by economists in a Bloomberg Survey. It expanded by 6.3% in the second quarter, but this was in large part due to fragile conditions in the previous year amid ultra-restrictive lockdowns.
• Consumer spending was a key contributor to growth over the quarter. Spending has been building some momentum as China emerged from lockdown restrictions. Retail sales figures for September show more robust year-over-year growth than in August.
• The PBOC reduced several key rates over the quarter, looking to increase liquidity and boost economic activity. The actions are helping.
• The economy is improving despite ongoing troubles in the property market and weaker trade activity. The property market continues to be weighed down by high debt levels. Exports slowed over the quarter amid muted global demand, largely in response to tight financial conditions.

A strong and growing Chinese economy is critical for the overall health of the global economy, given its size. Canada’s economy will also benefit from China’s strength, particularly given the trade between the two countries. Uncertain economic conditions have weighed on China’s equity market this year. While there could be some pockets of weakness and uncertainty in Chinese equities, some strong companies might withstand a downturn and grow as the economy emerges.

As always, please give us a call if you have any questions, or if you’d like to book a portfolio review. And in case you missed it, please join us for “Passport to Mapping Your Next Adventure” seminar in our boardroom on Wednesday October 25, 2023 from 2:30pm-4pm. We are excited to host Cathy Larsen, CEO and co-owner of the Sidney Departures Travel Agency.