Economic outlook: A return to normal in 2022?

12-minute read

Like the global economy, the Canadian economy will continue its transition from pandemic recovery-driven growth to more normal growth in 2022. The road to regaining this normality, however, will not be smooth and 2022 will be a year of transition.

In spite of this, households remain well positioned to support economic activity, with growth expected to reach 3.5% in Canada in 2022.

However, it will be important for Canadian entrepreneurs to keep an eye on their supply chains and rising costs, and to implement strategies to address the labour shortage, especially as it will persist for many years to come.

Key numbers for the Canadian economy in 2022

Average for the year Canadian GDP growth Oil (WTI) Exchange rate Policy rate
3,5% US$72 per barrel US$0.77 0.75% (*end of 2022)

Another strong year for the global recovery

Although the global economy largely recovered in 2021, the situation varies greatly from region to region, and the pandemic is still very present in parts of the world.

The International Monetary Fund expects global growth to reach 5.9% in 2021, but to moderate to 4.9% in 2022. This deceleration is mainly due to a slowing of the rebound since the re-openings and the tightening of monetary and fiscal policy support.

The COVID-19 crisis continues to highlight the importance of the Chinese economy in supply chains and maritime transport. China’s economic growth is slowing. Outbreaks of COVID-19 are leading to factory or port closures; the country is in the throes of an energy crisis and debt in the real estate sector is worrying investors.

However, global demand remains strong and should continue to support the economy despite downward pressure.

The Canadian economy is expected to continue to grow, but the gains will be more modest than could be expected at this point in the business cycle.

Slight downward pressure on the Canadian dollar

The United States is one of the few developed countries where GDP has fully recovered to pre-crisis levels. The American government’s extraordinary fiscal measures supported consumption, but there is still a long way to go in terms of employment. Demand for labour is expected to continue to recover while fiscal measures are reduced and as COVID-19 concerns ease.

Increases in commodity prices, including oil, supported the Canadian dollar in 2021 at around US$0.80. Expected commodity market movements in 2022 will exert slight downward pressure—especially in the second half of the year.

However, the divergence between U.S. and Canadian interest rates should help keep the Canadian dollar close to US$0.77 despite the risk of a more urgent change of course from the Federal Reserve.

Effects of the pandemic still felt in Canada

In Canada, the pandemic appears to be largely under control for the moment.

The number of new daily cases is rising but remains fairly low. Public health mesures are being relaxed across the provinces thanks to high vaccination rates—75% of the adult population is fully vaccinated.

Despite this rather enviable situation, Canadian economic activity is still facing the adverse consequences of the pandemic, which will continue well into 2022 and consequently moderate growth in the country.

The Canadian economy is expected to continue to grow, but the gains will be more modest than could be expected at this point in the business cycle.

Consumer demand: main engine of growth in Canada

Canadian households will remain the key to economic recovery in 2022. The savings they accumulated during the pandemic positions them well to support the economy and has provided them with a small cushion to absorb inflation. However, their consumption habits are expected to return to normal as restrictions on the services sectors gradually ease.

Residential investment will contribute positively to growth again in 2022. Despite tight inventories, the resale market could experience a wave of transactions at the beginning of the year. Some buyers who anticipate higher interest rates may be more aggressive in order to lock in lower rates.

The frenzy will slow as the Bank of Canada raises rates. That will be the case for housing starts as well.

The momentum of early 2021 continues to fade for the residential sector, but demand remains strong and housing starts will remain at high levels.

A powerful impetus from commodities

Canada’s growth will benefit from strong global demand for commodities. Commodity prices skyrocketed during the COVID-19 pandemic and are expected to remain at high levels for most of 2022, but a downtrend is emerging amid a Chinese industrial slowdown. A shift from goods spending to services spending will further temper demand.

Oil is expected to remain high in early 2022. Once the northern hemisphere winter is over and thanks to the continuous but gradual increase in supply by producing countries, prices are expected to fall slightly and return to levels similar to those seen before the pandemic.

Shortages: a bottleneck for growth

The rapid rebound in demand for raw materials, intermediate goods and various logistics services has been hampered by limited supply. This has hit several markets and is translating into exceptional price increases and late deliveries that are putting pressure on many supply chains.

The problems created by these bottlenecks will persist for much of 2022. Unable to obtain the productive capital and inputs needed for their operations, many companies have slowed or stopped production altogether.

Global supply chains have become so complex that it is difficult for them to recover from a disruption. As we saw with the blockage of the Suez Canal for 10 days in 2021, a seemingly limited disruption can have an infinitely larger impact on the system as a whole. This includes when a port shuts down due to a COVID-19 outbreak or when a plant shuts down to ration energy.

When bottlenecks affect upstream products, such as energy products and metals, the scarcity of these products will lead to greater spillover effects by restricting the production of other goods.

Canadian production is not only limited by physical inputs, but also faces a severe labour problem.

Labour shortage: a strong trend that will continue

Canadian production is not only limited by physical inputs, but also faces a severe labour problem.

Scarcity, shortage, skills match… the labour market challenges facing Canadian businesses will persist in 2022.

As a result, employment gains will be increasingly difficult to achieve, especially for high-contact service sectors (accommodation, food services, etc.) that require large numbers of workers. Although the share of GDP that remains to be recovered to reach the pre-pandemic peak is mostly in these sectors, their productive capacities changed during the pandemic and the return to normalcy will be more complicated for them.

3 proven strategies to address the labour shortage

In a study released in September 2021, we conducted an advanced statistical analysis to identify three strategies you can implement to prepare for future labour shortages.

  1. Invest in technology and automation
    When it comes to recruitment, investing in technology and automation is the most effective measure you can take in your business.

    Automation is not just about robots. It is any technology that performs repetitive tasks with reduced human input. Automation frees up workers for value-added tasks.

    It can be as simple as using software to automate sales forecasts and customer service, or it can be as complex as using computerized machining tools to automate a machine shop. There are also virtual assistants and automated text messages, automated email marketing, touchscreen terminals and self-service checkouts.
  2. Use formal hiring processes
    A second recruitment strategy is to use a formal hiring process. This means having a fully organized hiring procedure.

    Three steps are critical to a successful hiring process:

    While this may seem like an extra step, formalizing your hiring process reduces the time it takes to recruit and hire employees.
  3. Provide a comprehensive compensation package
    Overall compensation is a great retention tool. But it’s not just salary. A comprehensive compensation plan includes:

    • competitive salary and benefits
    • flexible work arrangements
    • mentoring
    It also includes paid leaves, health and wellness support, and a corporate culture that values diversity and inclusion.

Transitory or structural inflation?

Inflation is a growing concern for economic observers. It must be said that the base effect increased the inflation rate last year, because prices, particularly energy prices, dropped dramatically at the very beginning of the COVID-19 crisis. Some of the price increases observed in the past year can therefore be attributed to a return to normal.

Despite that effect, there are in fact price increases. The recent strength in inflation is being driven by soaring energy prices, rebounding demand for more recently reopened services, supply chain problems, container shortages and labour shortages.

It is important to distinguish short-term or transitory inflationary pressures from those that are systemic and structural. Current inflationary pressures remain transitory, but are weighing more heavily on the outlook and will last longer than initially anticipated.

Inflation is expected to return to more sustainable levels only by the end of 2022. By then, the Bank of Canada will have already begun tightening monetary policy in order to cool things down.

The rise in the inflation rate will therefore increase financing costs. Of course, credit conditions will remain favourable and affordable in the near future as these increases are phased in over time.

Robust growth despite increased pressure on capacity

After one of the most severe recessions in history in 2020, the economic recovery began quickly in 2021 thanks to effective vaccination efforts. While economic activity in some developed countries has already fully recovered, the Canadian economic outlook for 2022 is proving to be a little more complicated and the return to normal will be a little slower.

Again this year, growth will be limited by spillover effects from the pandemic.

Demand will remain strong as households reallocate some of their spending from consumer goods to services. Supply will continue to adjust accordingly, but pressure on supply chains could create a desynchronization of supply and demand that would negatively impact growth. Labour shortages and inflation will also continue to limit growth.

The Canadian economic outlook for 2022 is nevertheless encouraging. We should return to pre-pandemic GDP levels in the first few months of the new year, although several factors that contributed to the slowdown in the second half of 2021 will weigh more heavily on the recovery. It is clear that the evolution of the pandemic remains the biggest uncertainty for these forecasts.

Download the Canadian Entrepreneurs’ 2022 Investment Outlook for a more detailed look at the drivers of business investments for the next 12 months.

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