Peter Hall, Vice President & Chief Economist, Export Development Canada, oneof Canada’s top economists, brings us his fall economic update.
GROWTH IS FUNDAMENTALLY STRONG
Consumer spending has rebounded back above pre-pandemic levels in the US, Canada and Europe. Exports have also recovered, although we are currently experiencing a flatline due to lack of growth capacity from shipping delays. Emerging markets were also able recover quickly. The uneven recovery that we’re now experiencing is due to a burst of growth and genesis of supply chain issues. However, shipping and container costs are dropping faster than expected and it looks like we’re over the worst.
WHAT WILL HOLD GROWTH BACK?
Most of the developed world, including China is dealing with tightened labour market conditions, similar to the pre-pandemic space. Especially in Canada, where our population is so dependent on immigration, and we’ve had almost two years of little to no immigration. However, we see differences in labour participation rates. The US has recovered just 50% of participation lost during the pandemic, and Canada has seen a full return. With this gap, US companies may have more space to offer lucrative cross-border offers. Geopolitics, such as the US-China relationship, will create political uncertainty, and the shipping system needs to return to reliable conditions. And while we are managing the pandemic with higher rates of vaccinations, there are signs of continued waves, uncertainties due to variants, and impending lockdowns.
INFLATION MAY NOT BE TEMPORARY ENOUGH
Inflation isn’t mathematical, it’s behavioural. Our system is built for flow however prices of short supply assets are testing the market. The fundamental strength is there, but we didn’t turn on the machine as fast as we turned it off. Monthly US inflation rates consistently come in higher than target levels, so assuming inflation will be temporary is, for the moment, wishful thinking. In Canada, numbers are running parallel, at about 5% inflation on consumer costs and 15% on business costs. Consumer price inflation is expected to average at 3.2 to 3.4%.
THE SILVER LINING: DEMAND DEPOSITS
Demand deposits, which normally rise on a very slow, boring trend, are currently in excess of 18% of GDP in the US and 14% in Canada. So, while investments and savings have increased, we also have a pending tsunami of consumer wealth. These demand deposits are funds that consumers intend on spending and it’s a global phenomenon. It’s just a matter of how and when it will come into the economy, but it will not be fleeting or temporary. It will be bankable and spill into the economy for the next 3 to 5 years.
THE BOTTOM LINE
We will see strong growth as we continue to manage through the pandemic, assuming we avoid strict lockdowns in Canada or the US. Investment will pick up in a big way. Reshoring and nearshoring will occur as supply chains redistribute and we’ll continue to work through a tight labour market. Policies will shift as heavy government support decreases and we’ll see higher interest rates that will take up to 18 months to take effect. However, private sector growth will make up for that, and its sources will shift internationally towards Asia and fast-growing emerging markets such as Brazil and Mexico. Although we continue to navigate uncertainty, these indicators direct us to a generally optimistic forecast.