ECONOMIC IMPACT disease that is ever-present but can be managed. It’s a world in which vaccinations and physical distancing remain important to maintaining public health while the economy hums on. As millennials enter management and Gen Z workers join the labour market, the digital economy will only continue to grow. Hybrid work arrangements and flexible schedules will solidify their footing in the new normal. Up-skilling and re-skilling the workforce and innovation to increase productivity will be critical.
The baseline scenario We expect the Canadian economy to grow at a rate of 3.8 percent next year. This baseline is subject to risks including persistent high inflation, supply chain disruptions, the omicron variant and an aging workforce. Any and all of these could cause a drag on the recovery. Household savings increased during the pandemic, fuelled by government support programs like the Canada Emergency Response Benefit and a lack of spending avenues that put the savings rate at an elevated 11 percent. This cash cushion will allow households to comfortably spend into this year, although the effects will wane with high inflation and the omicron variant posing a risk to consumer confidence.
The Bank of Canada is walking a fine line between promoting economic recovery and anchoring inflation. It signalled an end to quantitative easing in October while maintaining its holdings of securities. Our RSM Canada Financial Conditions Index stands at 0.6 standard deviations above normal levels of risk, indicating an accommodative climate for investment. The market has priced in two full rate hikes by the middle of this year, suggesting that the central bank will soon be taking action toward policy normalization. Still, monetary policies will err on the side of prudence because the pandemic remains a threat to public health and economic activity. The strong economic outlook in the United States spells good news for Canada’s exports. But uncertainty regarding the pandemic in the international markets could extend the disruptions to the supply chain and hamper trade. Thanks in part to oil prices the Canadian dollar is projected to stay relatively strong around US$0.80. Strong oil and gas demand, with production and jobs picking up, will provide Alberta with a much-needed boost for growth, although the effect will unlikely be as vigorous as in the oil boom in 2014. As the Omicron variant unfolds, we do not expect it to have the same effects that the delta variant did. More than 75 percent of the
SPRING 2022
Canadian population is fully vaccinated, which may provide some protection although much about the variant is unknown. Looking abroad, more than half of the world has been vaccinated. Still, the omicron variant could undermine consumer confidence and strain global supply chains as restrictions tighten. This uncertainty could exacerbate the impact of the coronavirus on hard-hit sectors like tourism, and arts and entertainment. The recovery is pushed further into the second quarter as the omicron variant has led to shutdowns and restrictions around the country.
Inflation Inflation in Canada, as with other nations, hit the highest level in 30 years. While high inflation came about in part because of baseyear effects, or the comparisons to the low price levels of 2020, the actual number is even higher than expected. Supply constraints and surging demand are primarily responsible for high inflation. Natural gas and oil production, which had been falling for years, could not keep up with the release of pent-up demand in a reopening economy.
The current increase in inflation is being driven largely by volatile sectors like gasoline, food, shelter, utilities and transportation. Excluding food and energy, inflation looks much more moderate, at 3.4 percent. While inflation remains a primary risk to growth and can lead to rising wages, which further increases businesses cost of operation, it is projected to return to the 2 percent target toward the end of 2022. The new RSM Canada Supply Chain Index currently stands at 2.17 standard deviations below zero, indicating stress in the supply chain, but is up from the lows of last year. Though much can still change, there are signs that the worst of the supply chain bottlenecks might soon pass. The manufacturing outlook is optimistic, buoyed by strong demand and a smoother supply chain. The resolution of the supply chain disruptions will depend on many factors, including increasing energy production, vaccinating workers in global manufacturing hubs like Vietnam and India, resolving logistics, and addressing the shortages of important workers like truck drivers in the supply chain.
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