Canada’s stock market and economy continue to show resilience despite repeated calls for slowing global demand and a recession. Whereas the pandemic and post-pandemic era of investing has taken place under the seemingly binary conditions of an extremely “cold” or “hot” economy, the current landscape appears to be more mixed.

Mixed data can create mixed investment signals. However, a “not too hot and not too cold” scenario may be exactly what is needed to bring about market stability. After all, “not too hot” implies that the Central bank can forgo their extreme tightening measures, and “not too cold” implies that the consumer and labour markets should be able to survive an economic pullback. Combined, the economy is afforded more time for inflation to come down naturally rather than being forced lower by further Central Bank intervention.

Perhaps no dataset has provided more mixed signals than the consumer. Consumer spending in Canada increased to a high in Q4 2022 to $1.23 Trillion, and retail sales increased 4.3% in February 2023 Y-o-Y. Yet, Canadians continue to express concerns regarding their financial health. A recent consumer sentiment survey held by the Bank of Canada reflected the woes of consumers, with 30% of respondents stating that the higher interest rates have worsened their financial situation, and more than 50% felt a financial strain due to inflation.  This is unsurprising as Canadian Household Debt has ballooned to 180% of GDP.

What could be the reason behind the strong consumption trends despite the discouraging consumer surveys? According to RBC research, population growth in Canada has likely played a role. According to Stats Can, Canada’s population increased by 2.7%, aided by immigration. This is the strongest growth in immigration in over 50 years and the fastest among all OECD countries. Needless to say, the greater the population, the greater the volume of spending. However, despite the seemingly large numbers, consumption on a “per capita” basis has actually declined over the past two quarters and is below its pre-pandemic level. So, should investors be discouraged or uplifted by such mixed signals? We interpret this data positively as it implies the restrictive level of interest rates has successfully put a lid on rampant consumption and inflation; and although this may lead to a moderation in sales growth, corporate earnings should prove resilient as there is still a reliable aggregate level of spending in the economy.

This strong population growth may have also helped alleviate labour shortages for businesses, with 207,000 new jobs filled in Q1 2023. With labour shortages easing, wage growth could also begin to soften, which would be a positive development for a Central Bank that is keen to see an easing in wage inflation. According to the Bank of Canada’s Business Outlook Survey, an increasing number of corporations stated they feel less concerned about labour shortages. (see chart below) Perhaps substantiating these claims is the ‘average hourly earnings of permanent employees’, which moderated faster than expected in March. Overall, a landscape with an easing wage market with a persistently low unemployment rate provides further reason to believe the economy is on the right path towards a controlled decline in inflation.

Compared to the US, Canada’s inflation has proven to be less sticky and has decelerated at a faster pace. By the summer, Canada’s annual inflation is forecasted to retreat to around 3%. Achieving this level would support the Bank of Canada’s conditional pause on interest rates.  Ultimately, a continued “goldilocks” environment for the consumer may provide investors the economic “soft landing” that many hope to see.