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As the world recovers from the COVID-19 pandemic, the economy remains unconventional. Housing markets may cool off this year in some areas of the country, but not likely Alberta. The level of employment is back to its pre-pandemic level, yet labour shortages are a concern. Oil has rebounded, but we shouldn’t expect a boom.

To help Albertans understand such an atypical economic landscape, Alberta Central hosted a LinkedIn Live featuring Chief Economist Charles St-Arnaud. If you missed the event, you can rewatch the broadcast below or on our LinkedIn page here.

 

 

Here are some highlights from the broadcast. You can read the full 2022 Economic Outlook here.

Disposable income and savings

Despite significant job losses, household disposable income increased significantly thanks to government programs. The level of disposable income is above the level we would be at if it had grown at the pre-pandemic trend. That means households on average now are better off than they were pre-pandemic.

Many households also saved a significant amount during the recession. There are roughly 185 billion dollars in easily accessible bank accounts for households to spend. Whether they do so remains to be seen.

 

Booming housing market

The housing market has been very atypical for a recession. There was a sharp decline in number of sales in the spring of 2020 caused by uncertainty, but that soon reversed for a few reasons:

  • Many workers shifted to working from home and job security improved
  • A drop in interest rates led to a record low of mortgage rates in Canada, helping to make houses more affordable
  • Many people spending more time at home wanted to move to larger houses with more outdoor space

In Alberta we’re above the level of house sales we saw in 2014 and that is expected to continue. Where we’re different from the rest of Canada is that the change in house prices in Alberta has been much more subdued. Many markets have been increasing at over 20% year-on-year in prices while in Calgary it’s about 10% and Edmonton is 6%. This is thanks in part to more inventory here than in other areas.

 

Energy + inflation

The value of oil and production levels in Alberta has increased up to nearly 10 billion dollars a month, much higher than the previous record of $7.7 billion in 2014. However Alberta shouldn’t expect a boom as oil companies need to repair their balance sheets and continue to face structural challenges.

While energy prices are likely to increase slightly in 2022, they will gradually abate. That is important for inflation which is concentrated in gasoline, utilities (including natural gas) and food, linked to higher commodity prices globally. Inflation in Canada reached 4.8% in December, the highest its been in 30 years.

 

Bank of Canada

Because the shock on inflation is supply driven, keeping it in check will lead to weaker economic activity and higher unemployment, which is a concern since Canadian households are some of the most indebted in the world. But even though we’ll have some negative impact from higher rates, the Bank of Canada will need to control inflation expectations. If consumers and businesses start to expect continuously higher inflation and embed that in their expectations for wage growth and consumer prices then it becomes permanent.

With that in mind it is likely that the Bank of Canada will make some rapid rate hikes beginning at the March meeting then ending the year with the policy rate at 1.25%.

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