The world is entering the third year of the global COVID-19 pandemic. While most nations continue to recover from the shock of 2020, the pandemic-induced recession has led to challenges including supply chain disruptions, surging energy prices, rising food prices and labour shortages. To help navigate the upcoming year, Alberta Central’s chief economist Charles St-Arnaud has prepared an economic outlook that outlines challenges and opportunities related to the global, Canadian and Albertan economies.
During the pandemic, economies were shut down to prevent the spread of the virus; consumers were unable to go to stores, client-facing sectors closed temporarily, workers had to pivot to working from home and some manufacturers were forced to stop production while they could find ways to ensure workers’ safety. Because of the scale and duration of the disruption, frictions that arose during the recovery have been more broad-based and longer lasting, compounding to have a large global impact.
Rising global inflationary pressures is an important challenge for many governments and central banks around the world. The increase in energy prices has been a big contributor to the rise of global inflation. Gasoline prices have increased approximately 50% in the United States, 40% in Canada, 20% in the U.K and 30% in the Eurozone. Poor harvest seasons in North America and Brazil due to droughts and in Europe due to floods have contributed to global food price increases.
Supply chain issues have resulted in significant shortages that create inflationary pressures. For example, a global shortage of electronic and computer chips is limiting manufacturing in sectors like the auto industry. At the same time, demand for cars remains high as people would rather use a personal vehicle rather than mass transit during the pandemic. Transportation costs have also surged, with the price of shipping a 40-foot container between China and the West Coast of the United States rising to over $20,000 – well in excess of the roughly $2,000 it was in the years before the pandemic. While some increases may be absorbed by business, much of it will be passed on to consumers, pushing inflation higher.
This supply-driven inflationary environment complicates the work of central banks as they face a trade-off between fighting inflation by hiking rates and potentially stalling economic recovery. Moreover, tightening monetary policy will not solve the supply chain issues. As a result, inflation is expected to remain elevated globally in 2022.
The pandemic-induced recession of 2021 was one of the deepest, yet shortest in Canada’s history. The level of economic activity is now only 1.2% below its pre-pandemic level. We expect growth to reach 3.8% in 2022 and the level of economic activity to surpass its pre-pandemic peak in Q1. A significant share of growth is expected from the hardest-hit industries as activity continues to normalize.
Canada’s level of employment is back to its pre-pandemic level 19 months after the start of the recession, which is much faster than any other recoveries since 1980. However with continued slack in the labour market, labour shortages remain a concern and are often cited by businesses as a major issue limiting their capacity to grow. A change in working preferences – i.e. a reduced desire in client-facing industries – and weak immigration explains some of the lack of available workers. With no signs of relief in the short-term, the labour situation and stubbornly high inflation have the potential to lead to strong wage growth in 2022.
The average Canadian household is more financially well-off now than before the pandemic. This is due to a combination of income gains and a lack of spending opportunities. We estimate households have saved approximately $330 billion during the pandemic, about $185 billion of which is in bank accounts easily accessible with a debit card. However Canadian households remain some of the most indebted in the world, owing $1.77 for each dollar of disposable income earned. The risk to household spending this year is that rising interest rates and a normalization in disposable income will lead to an increase in the debt-service-ration. This would create a headwind on spending as households would need to reallocate discretionary spending to debt repayment.
2021 was a record year for the housing market in Canada. We expect the strength to continue at least in the first half of 2022 as buyers are likely to try and purchase a home before interest rates go up, as early as April. In the second half of 2022 we expect to see some moderation in activity across Canada overall, but not necessarily in the Prairies.
One of the most important economic stories of 2021 for Alberta has been the sharp reversal of fortune for the oil and gas sector, with production values reaching all–time highs since mid-2021. It is expected the rebound in the oil and gas sector will be a powerful tailwind for the Alberta economy in 2022, supporting income, employment, investment and government revenues.
While the surge in oil revenues is a positive for Alberta’s economy, we should not expect a return to the pre-2015 boom years. That’s because oil companies are focused on repairing and strengthening their balance sheets after a very challenging year in 2020. There will be a smaller spillover to other sectors such as construction companies and engineering firms. The main spillover will be higher income for oil and has workers, higher return for shareholders and bigger royalty revenues for the government.
The housing market is expected to remain strong in Alberta throughout 2022. While rate hikes are likely to slow the market in other provinces, housing affordability in Alberta does not depend on low rates to the same extent as other places in Canada. This is partly because cities in Alberta are not overvalued to the extent of other cities in Canada.
All in all, we expect Alberta’s economy to grow by 4.2% in 2022 which is higher than the rest of the country. We also forecast the province’s economy will start to expand beyond its 2014 peak at some point in 2022. While there are risks, in Alberta there are reasons to be optimistic about the year ahead.
Read and download the 2022 Alberta Central Economic Outlook here.
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.