The chart below shows that household disposable income in Canada is up 8.5% from a year ago. If you don't include the pandemic payments of 2020, this is the largest increase in 20 years. At first glance this may seem like things are going well. However, when we dig a little deeper we realize that most of income growth came from government payments.

 

 

Employment income growth came in at just under 4% in the fourth quarter. However, the surge in government transfers added more to incomes then actual worker's compensation. In the fourth quarter 2022, there was a doubling of GST rebates and a significant increase in old-age security which ended up giving the largest quarterly increase in after-tax income ever. Combine this with the fact that GDP growth in the fourth quarter came in negative, as per the chart below, then you realize the Bank of Canada has a problem.

 

 

 

At the last Bank of Canada meeting they announced that they would pause interest rate increases going forward. If you look at the data, it is obvious why they decided to pause. Canada had negative GDP growth in the same quarter of massive increases in government transfer payments. This is unsustainable. It is likely that going forward the US will increase their interest rates while Canada will have to hold off. This should create a very interesting investment climate for Canada. Especially with regard to the Canadian dollar and commodities. We will discuss this more in future notes.

 

I have also included a piece from our CIBC Economics Team entitled "Interest Rate Hikes and Inflation; are we there yet?".

 

As always, if you have any questions feel free to give us a call at any time.

 

Have a great weekend

 

Milan