Predictions for 2022

Lessons From An Economist

There’s one economist who I greatly admire and that is the illustrious Benjamin Tal, deputy chief economist at CIBC. He’s well respected and widely sought after and seems to have the uncanny ability to be right on target with his predictions. He even informs the Bank of Canada. Let’s hope they listen to him!

Here’s what we can expect in 2022 regarding 5 key issues : Covid, Inflation, Wages, Interest Rates and of course the darling of the pandemic era – REAL ESTATE!

COVID

With the rise in hospitalizations and Covid restrictions, we can expect the economy to be stagnant over the next few months or at least until hospitalization rates go down. Did you know that next to Mexico, Canada has the lowest capacity of acute care beds? This means we reach capacity much quicker than most other countries. It’s no wonder we are so reactive to covid numbers. However, there’s a general consensus that 2022 will be a transition year from a pandemic to an endemic which basically means we’re going to make friends with Covid and get on with our lives. Whose ready for that? 🙂

INFLATION

Canadians have accumulated an extra $300B since the onset of Covid. In 2021 alone we spent 4X as much as we would have spent in a “normal” year. Spending was as easy as pressing a button. In 2022 we’re going to see an ease of spending on goods and a move towards spending on services. After all, we’ve already bought the exercise bike last year and we’re starting to realize that we have can only have so much “stuff”.  It will be a lot easier to open a restaurant than a manufacturing facility. Services don’t depend on the supply chain as much as goods do. Think about it : 60-70% of inflation is Covid related. Look for a reduction of inflation by the end of the year as the supply chain issues lessen and Covid moves into the background of our lives.

WAGES AND THE LABOUR MARKET

The US is experiencing a very tight labour market right now mainly because people aged 55+ are quitting their jobs and don’t plan on returning.  We definitely have rising wages and a shortage of workers but there’s one key difference between the US and Canada –  Immigration!

Did you know that in 2021 Canada welcomed 400,000 immigrants while the US welcomed 500,000 immigrants, only 100,000 more?  It seems preposterous being that they are ten times as populous as we are. Do you know where most of our immigrants came from? Canada! Yup … people already living here – students, young people, well educated, fluent in English and with Canadian experience. The government simply fast tracked their status to Permanent Resident – very smart move indeed.

This isn’t to say that we don’t have a shortage of construction workers and health care workers because we certainly do but there’s no question that new immigrants are helping to increase our labour supply.

INTEREST RATES

It was a very smart PR move that the BOC didn’t raise rates last week. We’re in a lockdown in the midst of an Omicron crisis and small businesses are struggling. You get the picture.  But don’t be surprised if they raise rates by .50 basis points (1/2%) rather than .25 basis points come the spring. It’s ok that interest rates rise but what central banks (the rulers of monetary policy) need to be wary of is the speed at which they raise the rates. If they go too fast they risk trashing the economy. Did you know that every recession over the past 50 years was helped if not fully caused by central banks raising interest rates too quickly? It’s true. 

According to Mr. Tal, it’s reasonable to expect 4 rate increases this year with a goal of landing at a reasonably normal rate of 2% over the next 2 or 3 years but again timing and speed are everything. 

The other thing to consider is that when wages rise it doesn’t always mean inflation rises. For example if wages rise by 10% and productivity rises by 10%, that’s not inflation. Companies are sitting on $130B in excess cash right now and they are wisely investing in tech which correlates to higher productivity.

REAL ESTATE

Sales are stabilizing at well above pre-covid levels. We’re seeing people rushing to buy real estate before interest rates rise. Inventory levels are at their lowest ever so naturally with all of this demand home prices are increasing. Most homebuyers are well positioned, well employed and have savings. This isn’t the case for many young people though as we know and affordability is a troubling ongoing issue. 

Any disconnect between income and the ability to buy is offset by gifting. Did you know that in 2021, the average home buying gift was $80,000 and in cities like Toronto, Vancouver and Montreal it was as high as $340k? Did you know that this is just the beginning of the largest intergenerational wealth transfer in history? The elderly are gifting money to their grandkids and those same young buyers are also getting money from their parents.

This is not a bubble! The market will be slowed by rising interest rates but not diverted in any dramatic way unless the BOC raises rates too quickly and we go into a recession in 2023. Hopefully they are wise enough to know that slow and steady wins the race.