As we approach the two-year mark of the global pandemic, several developments look likely to influence what 2022 has in store for British Columbia’s economy.
The most important is the course of the pandemic itself. The sudden arrival of the hyper-contagious Omicron variant reinforces the point that COVID-19 has consistently outmuscled public health authorities around the world, including in Canada. The “fifth wave” of the virus is delivering another economic blow that will extend at least through the first quarter of 2022, dampening travel, tourism and in-person shopping and dining, while putting more pressure on fragile global supply chains and further disrupting education and health care. Later this month, we will downgrade our 2022 B.C. forecast to account for the effects of the new variant.
A second key development is the emergence of higher inflation and the implications for interest rates. Policymakers were caught off-guard by the surge of inflation in 2021. In Canada, the all-items consumer price index is now running close to an annualized 5% pace; in the U.S., inflation is even higher. In both cases, inflation readings are well above the targets set by central banks.
The jump in inflation occurred in tandem with the ongoing recovery from the downturn triggered by COVID-19 in 2020. Specifically, the emergence of higher inflation reflects the combination of an unprecedented world-wide demand shift from services to goods, tighter labour markets, extraordinary amounts of spending and other policy support provided by governments and central banks, and widespread supply-chain headaches.
Having largely recovered earlier output and employment losses, the Canadian and American economies today are operating with little spare capacity. Thus, even as the virus persists, we expect central banks to dial back monetary policy support in 2022. In its latest forecast, Goldman Sachs sees three to four interest rate hikes by the U.S. Federal Reserve over the next 12 months. In Canada, markets are pricing in a cumulative increase in the central bank’s policy rate – currently hovering at just 25 basis points – of 125-150 basis points by year’s end. Even a modest normalization of borrowing costs rates will inflict damage on Canada’s debt-addicted economy, especially the bloated housing sector.
A third focus for 2022 is commodity markets. Natural resources still make up more than three-quarters of B.C.’s international merchandise exports and account for about three-fifths of total exports of goods and services combined. Since mid-2020, B.C.’s economy has received a well-timed boost from higher prices for many resource-based goods – notably natural gas, lumber and pulp, metals and minerals, and some parts of the agri-food complex. Buoyant commodity markets have served as a helpful tailwind for the provincial economy as we came out of the COVID recession. In 2022, slower economic growth – globally and in North America – will reduce the contribution of commodities to B.C.’s rebound.
Global geopolitics is another issue on our radar. With the U.S. distracted and crippled by deep political and social divisions, the time may be right for America’s principal foreign adversaries to prosecute their advantage. A fresh Russian assault on Ukraine and further moves by China to undermine and even blockade Taiwan would not come as a surprise.
There are also risks around Iran, Chinese-Indian military tensions, North Korean’s nuclear program, and chaos in Afghanistan, Libya, Yemen and the Horn of Africa. Moreso than in recent years, mounting geopolitical conflict and uncertainty could weigh on the global economy and spark a major sell-off in equity markets.
Amid a less favourable and volatile external backdrop, 2022 also brings homegrown challenges for B.C. policymakers. As the province introduces another round of restrictions and postpones school reopenings, COVID-fatigue is a real concern. The pandemic’s impact has been remarkably uneven across industry sectors as well as households. Education has been hurt and many British Columbians’ mental health is stretched. As the rapid spread of Omicron rekindles fears of illness and threatens the health-care system, there is growing recognition that the economic dislocation, disruptions to schooling and daily life, and delayed health-care treatments of the last two years are not sustainable. In this environment, even as economic growth downshifts, we expect hiring challenges and worker shortages to persist for many B.C. employers. With labour supply dampened by virus fears, accelerating retirements, and (in some quarters) vaccine-reluctance, the constrained supply of labour may end up being the province’s biggest domestic economic headwind in 2022. •
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.