As we approach the two-year mark of the global pandemic, several developments look likely to influence what 2022 has in store for British Columbia’s economy.
The most important is the course of the pandemic itself. The sudden arrival of the hyper-contagious Omicron variant reinforces the point that COVID-19 has consistently outmuscled public health authorities around the world, including in Canada. The “fifth wave” of the virus is delivering another economic blow that will extend at least through the first quarter of 2022, dampening travel, tourism and in-person shopping and dining, while putting more pressure on fragile global supply chains and further disrupting education and health care. Later this month, we will downgrade our 2022 B.C. forecast to account for the effects of the new variant.
A second key development is the emergence of higher inflation and the implications for interest rates. Policymakers were caught off-guard by the surge of inflation in 2021. In Canada, the all-items consumer price index is now running close to an annualized 5% pace; in the U.S., inflation is even higher. In both cases, inflation readings are well above the targets set by central banks.
The jump in inflation occurred in tandem with the ongoing recovery from the downturn triggered by COVID-19 in 2020. Specifically, the emergence of higher inflation reflects the combination of an unprecedented world-wide demand shift from services to goods, tighter labour markets, extraordinary amounts of spending and other policy support provided by governments and central banks, and widespread supply-chain headaches.
Having largely recovered earlier output and employment losses, the Canadian and American economies today are operating with little spare capacity. Thus, even as the virus persists, we expect central banks to dial back monetary policy support in 2022. In its latest forecast, Goldman Sachs sees three to four interest rate hikes by the U.S. Federal Reserve over the next 12 months. In Canada, markets are pricing in a cumulative increase in the central bank’s policy rate – currently hovering at just 25 basis points – of 125-150 basis points by year’s end. Even a modest normalization of borrowing costs rates will inflict damage on Canada’s debt-addicted economy, especially the bloated housing sector.
A third focus for 2022 is commodity markets. Natural resources still make up more than three-quarters of B.C.’s international merchandise exports and account for about three-fifths of total exports of goods and services combined. Since mid-2020, B.C.’s economy has received a well-timed boost from higher prices for many resource-based goods – notably natural gas, lumber and pulp, metals and minerals, and some parts of the agri-food complex. Buoyant commodity markets have served as a helpful tailwind for the provincial economy as we came out of the COVID recession. In 2022, slower economic growth – globally and in North America – will reduce the contribution of commodities to B.C.’s rebound.
Global geopolitics is another issue on our radar. With the U.S. distracted and crippled by deep political and social divisions, the time may be right for America’s principal foreign adversaries to prosecute their advantage. A fresh Russian assault on Ukraine and further moves by China to undermine and even blockade Taiwan would not come as a surprise.
There are also risks around Iran, Chinese-Indian military tensions, North Korean’s nuclear program, and chaos in Afghanistan, Libya, Yemen and the Horn of Africa. Moreso than in recent years, mounting geopolitical conflict and uncertainty could weigh on the global economy and spark a major sell-off in equity markets.
Amid a less favourable and volatile external backdrop, 2022 also brings homegrown challenges for B.C. policymakers. As the province introduces another round of restrictions and postpones school reopenings, COVID-fatigue is a real concern. The pandemic’s impact has been remarkably uneven across industry sectors as well as households. Education has been hurt and many British Columbians’ mental health is stretched. As the rapid spread of Omicron rekindles fears of illness and threatens the health-care system, there is growing recognition that the economic dislocation, disruptions to schooling and daily life, and delayed health-care treatments of the last two years are not sustainable. In this environment, even as economic growth downshifts, we expect hiring challenges and worker shortages to persist for many B.C. employers. With labour supply dampened by virus fears, accelerating retirements, and (in some quarters) vaccine-reluctance, the constrained supply of labour may end up being the province’s biggest domestic economic headwind in 2022. •
Jock Finlayson is the Business Council of British Columbia’s senior policy adviser; Ken Peacock is the council’s senior vice-president and chief economist.
(Bloomberg) — The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
“All eyes are on the US,” Kristalina Georgieva said in an interview on Bloomberg’s Surveillance on Thursday.
The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies.”
The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last.
“That’s what I hear from countries,” said the leader of the fund, which has about 190 members. “How long will the Fed be stuck with higher interest rates?”
Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.
Read More: A Resilient Global Economy Masks Growing Debt and Inequality
Georgieva said the IMF is optimistic that the conditions will be right for the Federal Reserve to start cutting rates this year.
“The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”
The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies.
China Overcapacity
“If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Georgieva said.
“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she added.
A number of countries have recently criticized China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.
US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.
Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.
(Updates with additional Georgieva comments from eighth paragraph.)
The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
Author of the article:
Bloomberg News
Jonathan Ferro and Christopher Condon
Published Apr 18, 2024 • 2 minute read
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(Bloomberg) — The head of the International Monetary Fund warned the US that the global economy is closely watching interest rates and industrial policies given the potential spillovers from the world’s biggest economy and reserve currency.
“All eyes are on the US,” Kristalina Georgieva said in an interview on Bloomberg’s Surveillance on Thursday.
Article content
The two biggest issues, she said, are “what is going to happen with inflation and interest rates” and “how is the US going to navigate this world of more intrusive government policies.”
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The sustained strength of the US dollar is “concerning” for other currencies, particularly the lack of clarity on how long that may last.
“That’s what I hear from countries,” said the leader of the fund, which has about 190 members. “How long will the Fed be stuck with higher interest rates?”
Georgieva was speaking on the sidelines of the IMF and World Bank’s spring meetings in Washington, where policymakers have been debating the impacts of Washington and Beijing’s policies and their geopolitical rivalry.
Read More: A Resilient Global Economy Masks Growing Debt and Inequality
Georgieva said the IMF is optimistic that the conditions will be right for the Federal Reserve to start cutting rates this year.
“The Fed is not yet prepared, and rightly so, to cut,” she said. “How fast? I don’t think we should gear up for a rapid decline in interest rates.”
The IMF chief also repeated her concerns about China devoting too much capital and labor toward export-oriented manufacturing, causing other countries, including the US, to retaliate with protectionist policies.
China Overcapacity
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Article content
“If China builds overcapacity and pushes exports that create reciprocity of action, then we are in a world of more fragmentation not less, and that ultimately is not good for China,” Georgieva said.
“What I want to see China doing is get serious about reforms, get serious about demand and consumption,” she added.
A number of countries have recently criticized China for what they see as excessive state subsidies for manufacturers, particularly in clean energy sectors, that might flood global markets with cheap goods and threaten competing firms.
US Treasury Secretary Janet Yellen hammered at the theme during a recent trip to China, repeatedly calling on Beijing to shift its economic policy toward stimulating domestic demand.
Chinese officials have acknowledged the risk of overcapacity in some areas, but have largely portrayed the criticism as overblown and hypocritical, coming from countries that are also ramping up clean energy subsidies.
(Updates with additional Georgieva comments from eighth paragraph.)
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