In this week’s economic update, we are looking at the message being delivered by policy makers while they continue their efforts to control inflation without over-tightening conditions. This includes examining resilient consumer spending, the impacts of geopolitical risks and international forces, and the need for patience as the efforts of inflation-controlling policies continue.
We would like to highlight the recent success of the Gift of Health Gala, in support of the Milton District Hospital Foundation. This year, $614,000 was raised towards the purchase of critical equipment – an incredible result for the Foundation and for the Milton community.
We are also sharing an article from Proof Point, a RBC thought-leadership publication, highlighting some of the factors they believe will be contributing the slowing or disappearance of fiscal tailwinds for Canadian provinces.
Economic Update
Global equity and bond markets have started the month of November on a bit of a better note compared to the past few months. The U.S. Federal Reserve held interest rates steady in its policy update this past week, following in the path of a few other major central banks. The general message from policy makers has been consistent: they are trying to balance the risk of over-tightening financial conditions with the need to ensure policy is sufficiently restrictive for long enough to bring inflation sustainably under control. Below, we share some takeaways from the third quarter earnings season which is well more than halfway complete.
Resilient consumers creating GDP growth in the U.S.
Overall, corporate earnings results have been fine, particularly when compared to expectations that remain cautious. The better-than-expected U.S. earnings results come on the heels of similarly better-than-expected U.S. economic data. The most recent U.S. GDP figures, which represent the most common measure of economic growth, grew at an annualized pace of nearly 5% for the July-through-September period. That was not only higher than expected but represented the highest rate of quarterly growth since late 2021. The strength was driven by an ever-resilient consumer, which continues to surprise to the upside. It’s worth noting the data hasn’t been as inspiring on the Canadian side, where comparable GDP figures have been weaker.
Continued uncertainty still impacting economic outlook
Despite positive headlines around the U.S. economy and corporate earnings results, the overall tone of the outlooks and commentary from management teams has been more guarded. This reflects the concern that businesses have over the elevated level of uncertainty with respect to the future path of the economy given high borrowing costs, inflation pressures, geopolitical risks, and pressures in some foreign markets like China and even Europe to some extent. Many businesses acknowledged that the U.S. economy, and the consumer in particular, have been stronger than expected. But many questioned whether, or more accurately, how long, the consumer resilience could be sustained.
Labour and credit remaining somewhat normalized
Some potential cracks on the consumer front have started to emerge, with delinquencies trending higher in areas like credit cards and auto loans. Nevertheless, banks continue to characterize the latter increases as being a normalization of credit trends, rather than anything particularly troubling. Meanwhile, the labour backdrop remains healthy but changes are occurring at the margin, with management teams through this past earnings season commenting on the lower levels of employee turnover and slower pace of hiring. Several companies have intensified their focus on costs and have reduced their capital spending plans as a result.
U.S. consumer spending will take time to adjust
The actions noted above may be music to the ears of central banks. After all, they raised rates aggressively and quickly over the past year or so in an effort to slow inflation pressures and cool economic activity. Businesses seem to increasingly be doing their part by adapting to the environment. On the other hands, U.S. consumers seem to largely be undeterred by higher rates and the higher cost of living to this point. Nevertheless, it may just be a matter of time before they too start to adjust their behaviour in a bigger way by slowing their own spending plans, leading to weaker demand for goods and services. Admittedly, this view may continue to require some patience to see it play out.
$614,000 raised at Gift of Health, in support of Milton District Hospital Foundation
We had the privilege of attending the Milton District Hospital Foundation’s ‘Gift of Health’ gala on October 21st, held at the Burlington Convention Centre. This year’s gala raised $614,000 – these funds will enable the hospital to purchase the essential medical equipment it needs to ensure quality healthcare is available close to home.
We are proud long-time supporters and sponsors of the Foundation, recognizing the important role the Foundation plays in the wellness of the Milton area.
Thank you to everyone who made the night a success, to the region’s generous donors, and congratulations to the Foundation on another fabulous event.
Proof Point: Fiscal tailwinds coming to an end for Canada’s provinces
In the height of the COVID-19 pandemic, governments doled out financial support to keep households and businesses afloat. Together with drops in tax revenues, federal and most provincial governments when into deep budget deficits. While it seemed it would take years to return to more sustainable debt levels, the economy rebounded faster than expected on the back of a strong reopening and soaring inflation.
The favourable fiscal environment may be coming to an end however. In this Proof Point article from RBC, the factors bringing a potential end to the fiscal tailwinds are examined, including weaker economic growth, rising operating costs, and upward pressure on debt servicing costs.
You can read the article here.
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.
