The past three months have brought a caravan of negative news about the global economy. Amid the war triggered by Russia’s invasion of Ukraine and the continued ructions stemming from the stubborn COVID-19 pandemic, the world is dealing with a toxic mix of escalating inflation, soaring oil and food prices, gummed-up supply chains and rapidly tightening monetary policy in the major advanced economies.
Since the beginning of June, both the World Bank and the Organization for Economic Co-operation and Development have sharply downgraded their economic growth projections for 2022 as well as 2023. Measures of consumer sentiment have plunged in the United States, and housing markets have started to wobble. Soaring energy prices and trade disruptions linked to the Russia-Ukraine conflict have set the stage for a probable recession in Europe.
Of greatest concern, inflation readings are running at three to four times the official targets set by central banks, including the Bank of Canada. Equity markets have been tanking, shaving many trillions of dollars from worldwide wealth as investors recalibrate previous frothy valuations distorted by a long stretch of near-zero interest rates. Indeed, after two years of serving as cheerleaders for bloated asset markets, central bankers have radically shifted course. They are now the principal enemies of what, until recently, were sky-high valuations for public equities, private businesses, crypto assets and real estate.
This is the uncomfortable backdrop for Canadian forecasters struggling to update their assessment of what lies ahead for our economy.
At first glance, it is hard to see evidence of an imminent slump in the Canadian context– still less in B.C. The job market is drum tight. Employment in B.C. now stands 100,000 above the pre-pandemic benchmark, and employers are scrambling to fill vacant positions. Canadian household net worth reached an all-time high in March 2022. Moreover, high global prices for energy, foodstuffs and some parts of the minerals/metals complex have worked to Canada’s economic advantage, generating a significant positive “terms of trade” shock.
In the year to April 2022, due mostly to rising commodity prices, the value of Canada’s exports surged by 21 per cent, while the cost of imports climbed by 11 per cent. The export lift has translated into tens of billions of dollars of additional income for Canadian businesses, employees, investors and governments. Closer to home, the improved terms of trade have also boosted B.C.’s merchandise exports, which were up 40 per cent in April over the previous year.
The challenge for forecasters is that the positive data noted above reflects the recent past. The key question is how runaway inflation and higher borrowing costs will weigh on the economy going forward. Most forecasters – including the Business Council of BC – still see B.C. posting solid GDP growth in the range of three to four per cent this year, before dipping to around two per cent in 2023. But this projection rests on a few key assumptions: most importantly, that the world economy continues to expand, even if modestly, and that higher interest rates don’t crush the housing and real estate sectors, which play an outsized role in B.C.’s economy.
A few other factors should also help B.C. avoid a pronounced economic downturn. One is the elevated level of construction spending, flowing from a handful of large projects and further augmented by robust growth in public sector capital outlays. Second is the demographic picture. Last year, B.C. saw a net inflow of 100,000 migrants, as international immigration roared back following a brief hiatus in 2020. The number of interprovincial migrants arriving in B.C. also rose. The Trudeau government has settled on accelerating immigration as the main plank in its overall economic strategy. Whether this is a wise choice is debatable, but it will result in an expanding domestic economy as a growing population bolsters spending on goods, services and housing. A third factor that’s particularly relevant to B.C. is the expected rebound of international tourism, following two years of pandemic carnage. International visitors are by far the most lucrative slice of the broader tourism market, and they should be returning in large numbers over the balance of 2022 and beyond. That, too, should provide a boost for the province’s economy
From today’s vantage point, B.C. looks reasonably well-positioned to steer clear of a recession, even as the global economy loses steam. But the external backdrop has deteriorated dramatically, and the threat of more persistent inflation means downside risks are mounting.
Jock Finlayson is the Business Council of British Columbia’s senior policy adviser; Ken Peacock is the council’s senior vice-president and chief economist.
As published in Business in Vancouver.