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Restaurants are making you pay for Ontario's minimum wage hike

Briefing highlights

  • Inflation eases but …
  • … consumers paying for wage hike
  • Bank of America boosts Canada forecast
  • Markets at a glance
  • RBC posts flat profit, raises dividend
  • OMERS posts 11.5-per-cent return
  • China seizes control of Anbang
  • U.S. tells India to cut tariffs

Annual inflation eases but …

Ontario consumers appear to be paying the price for the increase in the minimum wage.

There's evidence that restaurants and other businesses are passing that increase onto consumers, which you can glean from today's Statistics Canada report on January inflation.

"Restaurant prices posted the second-largest monthly increase of the past 27 years - if you were to think that was the result of Ontario's minimum wage, you'd be correct," Bank of Montreal senior economist Robert Kavcic said of the overall report.

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"Indeed, Ontario restaurant prices jumped 1.9 per cent in the month (nsa), by far the most in Canada, and an entirely predictable response," he added, noting the numbers were not seasonally adjusted.

Restaurant prices across Canada rose 3.7 per cent in January from a year earlier, a far faster pace than December's 2.9 per cent. The overall move higher in food prices, of 2.3 per cent, was the fastest pace since April, 2016.

In Ontario alone, Statistics Canada said, restaurant meals climbed 4.9 per cent, and child care and housekeeping services almost 10 per cent. That, the agency said, coincided with "a legislated minimum wage increase."

It's interesting, given the controversy over minimum wages and the impact on jobs, to compare last week's report on the labour market and today's inflation release.

"The impact of minimum wage legislation in Ontario was hard to ascertain in the January employment report, but easier to see in the price data," said Toronto-Dominion Bank senior economist James Marple.

"The acceleration in food price growth came in large part due to restaurants and in Ontario. Child care and housekeeping services prices also accelerated in the month."

Annual inflation in general eased to 1.7 per cent, down from December's 1.9 per cent, while rising by a stronger-than-expected 0.7 per cent on a monthly basis.

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If you ignore food and energy prices, consumer prices rose 1.5 per cent over the year and 0.2 per cent from December, so all in all "a material acceleration over the past few months," said Royce Mendes of CIBC World Markets.

There was also the fact that the Ontario Hydro rebate of a year ago fell out of the reading, noted Arlene Kish, director of Canadian economics at IHS Markit.

And if you remove Ontario from the national equation, annual inflation eased to about 1.6 per cent from 2.1 per cent in December, added Royal Bank of Canada senior economist Nathan Janzen.

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'Sugar rush'

Bank of America Merrill Lynch is suddenly more upbeat about Canada's economy, expecting a "sugar rush" from America's fiscal stimulus.

And what its forecast could mean is a bump in interest rates that's greater than we might be expecting.

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The new projection isn't a huge difference, but every basis point counts. And its call for Canadian economic growth this year is better than some others expect.

Carlos Capistran, the bank's Canada and Mexico economist, said in a report this week that he now expects Canada's economy to expand by 2.5 per cent this year, up from an earlier forecast of just 2.2 per cent, though still shy of what is believed to have been growth of 3 per cent in 2017.

He also revised his projection for annual inflation to 2 per cent, from his earlier 1.9 per cent, his forecast for unemployment to just 4.9 per cent, from his previous 5 per cent, and his expectation for Bank of Canada rate hikes to four from three.

That would bring the central bank's benchmark overnight rate to 2 per cent.

"The U.S. economy is getting pumped with stimulus this year," Mr. Capistran said in his report, titled "Sugar rush from U.S. fiscal candy".

"First came a reduction and now an increase in expenditure."

Bank of America economists have revised their projection for U.S. economic growth this year to 2.9 per cent, compared to an earlier 2.4 per cent, and they expect the Federal Reserve to bump up its key rate three times, and possibly four.

"Stronger economic growth in the U.S. will increase the demand for Canadian goods and services, providing a boost to GDP growth," Mr. Capistran said.

"An increase in U.S. corporate investment, U.S. household consumption, and U.S. government expenditure will reduce savings in the U.S., which in turn will increase the U.S. current account deficit," he added.

"This ultimately means that Americans are likely to choose to spend at least part of the stimulus on imported goods and services. The U.S. imports most of its goods and services from China, Mexico and Canada, so these three countries stand to benefit from strong U.S. growth, moreso Mexico and Canada, as their exports to the U.S. represent more than 25 per cent and 15 per cent of their GDP, respectively."

Given all this, Mr. Capistran said, the Bank of Canada will have to react more forecefully, and thus three more rate hikes this year to bring the total to four.

"One reason for the BoC to increase the pace at which it is withdrawing stimulus is because stronger U.S. growth will increase growth and inflation in Canada," Mr. Capistran said. "So we believe the BoC needs to recalibrate its monetary policy."

Central bank governor Stephen Poloz and his colleagues risk "being behind the curve" if they don't march to the drum of new data. And because "the Fed may do so."

Compare this to the recent forecast from Bank of Montreal, which expects economic growth of 2.2 per cent this year, and just two more rate hikes.

"While financial conditions remain supportive and resource prices could rise moderately further, higher interest rates and tougher mortgage rules will apply a brake on consumer spending and home sales," said BMO senior economist Sal Guatieri.

"Meantime, the ongoing threat of trade protectionism will impede investment," he added.

"Although stronger U.S. demand is helpful, the fact that Canada's non-resource export volumes are little changed in the past decade is a testament to a loss of competitiveness for many companies as they deal with new regulations, rising mandated labour costs and new environmental protections."

Mr. Capistran's forecast, like others, comes with the caveat surrounding talks to overhaul the North American free-trade agreement.

Most observers believe Canada, the United States and Mexico will strike a new deal, though the form it takes is, of course, a matter of speculation.

"Uncertainty regarding NAFTA is already having a negative impact on investment, but we believe benefits from the U.S. fiscal stimulus will top NAFTA negatives in the short run," Mr. Capistran said.

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Markets at a glance

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RBC profit flat

Royal Bank of Canada posted relatively flat first-quarter results, but with some noise in the background.

RBC also raised its quarterly dividend by 3 cents, to 94 cents.

The second of Canada's major banks to report, following Canadian Imperial Bank of Commerce on Thursday, RBC said profit was little changed at $3-billion, or $2.01 a share diluted, up 2 per cent.

The latest quarter included a writedown related to the U.S. tax reform, of $178-million or 12 cents a share.

And when you strip out last year's gain on the sale of certain U.S. operations, profit rose 7 per cent, and earnings per share 10 per cent, the bank said.

Return on equity was 17.4 per cent, up 70 basis points.

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