Putting the inflation genie back in the bottle

June 1, 2022
Ken Peacock
David Williams

Highlights

  • Global GDP growth is expected to slow from 6.1% in 2021 to 3.6% in 2022 and 2023. United States GDP will decelerate from growth of 5.7% in 2021 to 3.7% in 2022 and 2.3% in 2023.
  • Across several advanced economies, including Canada, fiscal and monetary policies have been too loose for too long. Demand for goods and services is outstripping supply. Inflation rates in the United Kingdom (9% y/y), United States (8.3%), Euro area (7.4%), Canada (6.8%) and Australia (5.1%) are several multiples of central bank inflation targets.
  • Central banks’ challenge of “putting the inflation genie back in the bottle” is complicated by the ongoing looseness of fiscal policy and the economic and financial implications of Russia’s invasion of Ukraine. Higher real interest rates are needed to cool overheating economies, but adjusting to higher borrowing costs will be a challenge for many economies, especially Canada.
  • Canadian GDP growth is expected to moderate from 4.6% in 2021 to 3.9% in 2022 and 2.8% in 2023. CPI was 6.8% y/y in April and has been above the Bank of Canada’s inflation control range of 1-3% for 13 consecutive months. Federal policies are supporting booming residential investment and goods consumption, while business investment and exports are yet to recover to pre-pandemic levels even though Canada’s external terms of trade are at near-record levels. Policy settings continue to promote an unbalanced and uncompetitive economy.
  • B.C.’s economy is forecast to grow at a brisk 3.8% in 2022 before retreating to a more typical 2.4% in 2023. B.C. is benefitting from strong global commodity markets. The positive backdrop for exports underpins our forecast for above average growth in 2022. In addition, ongoing construction of several large capital projects all continue to make sizable contributions over the forecast horizon.
  • Domestic economic activity continues to recover with the more complete reopening of consumer services. However, growth in consumer spending is overshadowed by rising inflation and mounting debt servicing costs for households and firms in the province.
  • Aggregate numbers suggest the labour market is overheated and there are large numbers of unfilled job openings in certain sectors. As the Bank of Canada throttles back on monetary stimulus to cool inflation, labour market pressures should start to ease in 2023.
  • The unwinding of the extraordinary COVID-related government support for businesses and individuals, and sharp hikes in interest rates, will dampen household income growth and challenge the viability of some businesses going forward.
B.C. Economic Outlook
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