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Fall in house prices to contribute to lower CPI inflation

The 10% fall in house prices that we expect over the next 12 months will also help to pull down CPI inflation, via its impact on shelter costs. Admittedly, shelter inflation is unlikely to decline meaningfully until 2023, because of soaring mortgage costs, but this is nevertheless one reason to expect headline inflation to drop back sharply next year.
Stephen Brown Senior Canada Economist
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Canada Economics Weekly

Economy losing momentum

While the apparent contraction in GDP in May appears to have been partly due to temporary factors, it also reflects the impact of the surge in interest rates on housing. With the business surveys for June also showing a loss of broader momentum, the economy may be slowing even sooner than we anticipated.

We are sending the Weekly early this week as our Toronto office is closed for the Canada Day holiday on Friday. Happy Canada Day!

30 June 2022

Canada Data Response

GDP by Industry (Apr.)

The preliminary estimate suggests that the healthy 0.3% m/m rise in GDP in April was followed by a shock 0.2% contraction in May but, as this appears to have been partly due to temporary factors, it probably won’t stop the Bank of Canada from enacting a larger 75 bp interest rate hike next month.

30 June 2022

Canada Chart Book

Tight labour market pushing up wages

The tight labour market is putting upward pressure on wages, with the Labour Force Survey showing a strong 1.0% m/m rise in average hourly earnings in May. While the annual rate of wage growth, at 3.9% y/y, remained lower than before the pandemic, base effects mean it is likely to accelerate to closer to 6% over the second half of 2022. All this adds to the pressure for the Bank of Canada to rapidly tighten policy, particularly as the current weak rate of productivity growth suggests that there is minimal scope for businesses to absorb higher wage costs. We expect the Bank to raise its policy rate by 75 bp in July and follow that with a further 50 bp hike in September and a 25 bp hike in October, to take the policy rate to 3.0%. By then, we think the weakness in the housing market and a sharp slowdown in employment growth will be enough to cause the Bank to pause its tightening cycle, and ultimately remain on the side lines as GDP growth slows below its long-run potential in 2023.

29 June 2022

More from Stephen Brown

Canada Data Response

Manufacturing Sales (Mar.)

The rise in manufacturing sales in March was entirely due to higher commodity prices, but the orders data and the business surveys suggest that sales volumes will do better in the coming months.

16 May 2022

Canada Economics Weekly

Gasoline price jump to drive CPI inflation above 7%

The unexpected further jump in gasoline prices, reflecting a sharp widening of refiners’ margins, means we now expect headline CPI inflation to rise above 7% in May. While the rise in refiners’ margins presents an upside risk to our inflation forecasts over the rest of 2022, we expect this to be largely offset by the impact of a fall in house prices on shelter inflation.

13 May 2022

Canada Economics Focus

Will a housing downturn crash the economy?

We expect higher interest rates to cause a 10% fall in house prices over the next 12 months and an even steeper fall in residential investment. With the rest of the economy still recovering from the pandemic and benefitting from higher commodity prices, that weakness should cause GDP growth to slow sharply rather than turn negative, but the downside risks of recession are rising. Canada Drop-In (10th May, 12:00 EDT/ 17:00 BST): We’ll be discussing the impact of monetary tightening on the economy and whether the Bank of Canada is risking a policy mistake in this special 20-minute briefing. Register now

9 May 2022
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