Canada’s economy had a bumpy ride in the past year, as the promise of mass vaccinations was followed by supply chain disruptions, a global energy crisis and rising inflation.
Looking ahead to next year, we see a Canadian economy continuing to recover, even as businesses and consumers contend with challenges that now include the omicron variant of the coronavirus. Our forecast:
- Gross domestic product: Growth will be around 4% on the year, with gross domestic product surpassing the pre-pandemic level early in the year.
- Inflation: Expect inflation to hit 5% in 2022 and stay elevated around 3.5% before returning to the 2% target by the year’s end.
- Employment: The job market will continue to contend with the dual challenges of a tight labor market and high long-term unemployment, as the unemployment rate declines to just above 6%.
While the omicron variant presents a threat to all these areas of the economic outlook, we do not expect its impact to significantly derail the recovery.
We see a Canadian economy continuing to recover, even as businesses and consumers contend with challenges that now include the omicron variant.
The housing market, which broke records this past year, might hit a plateau in 2022, but a major correction is not in the picture.
After an uneventful election in September that left the federal government virtually unchanged, we can expect federal spending to follow its budget from last April.
Broad-based COVID government support programs ended this year, and more targeted support programs will also be phased out in place of economic stimulus programs before the budget is tightened in 2023.
The year ahead will also have substantial federal investment in developing a net-zero economy and boosting a green recovery. Business opportunities lie in energy efficiency, carbon capture and storage technology, natural infrastructure and bolstering climate resiliency.
Still, there are considerable risks to the outlook—some that cannot be predicted. The omicron variant is a case in point.
Canada will need to adapt to a new world in which we learn to live with an endemic, or a disease that is ever-present but can be managed. It’s a world in which vaccinations and physical distancing remain important to maintaining public health while the economy hums on.
As millennials enter management and Gen Z workers join the labor market, the digital economy will only continue to grow. Hybrid work arrangements and flexible schedules will solidify their footing in the new normal. Upskilling and reskilling the workforce and innovation to increase productivity will be critical.
The baseline scenario
We expect the Canadian economy to grow at a rate of 4.1% next year. This baseline is subject to risks including persistent high inflation, supply chain disruptions, the omicron variant and an aging workforce. Any and all of these could cause a drag on the recovery.
Household savings increased during the pandemic, fueled by government support programs like the Canada Emergency Response Benefit and a lack of spending avenues—which put the savings rate at an elevated 11%.
This cash cushion will allow households to comfortably spend into 2022, although the effects will wane with high inflation and the omicron variant posing a risk to consumer confidence.
The Bank of Canada is walking a fine line between promoting economic recovery and anchoring inflation. It signaled an end to quantitative easing in October while maintaining its holdings of securities.
The Bank of Canada is walking a fine line between promoting economic recovery and anchoring inflation.
Our RSM Canada Financial Conditions Index stands at 0.6 standard deviations above normal levels of risk, indicating an accommodative climate for investment.
The market has priced in two full rate hikes by the middle of 2022, suggesting that the central bank will soon be taking action toward policy normalization. Still, monetary policies will err on the side of prudence because the pandemic remains a threat to public health and economic activity.
The strong economic outlook in the United States spells good news for Canada’s exports. But uncertainty regarding the pandemic in the international markets could extend the disruptions to the supply chain and hamper trade.
Thanks in part to oil prices, the Canadian dollar is projected to stay relatively strong around $0.80 USD.
Strong oil and gas demand, with production and jobs picking up, will provide Alberta with a much-needed boost for growth, although the effect will unlikely be as vigorous as in the oil boom in 2014.
As the omicron variant unfolds, we do not expect it to have the same effects that the delta variant did. More than 75% of the Canadian population is fully vaccinated, which may provide some protection, although much about omicron is unknown. Looking abroad, more than half of the world has been vaccinated.
Still, the omicron variant could undermine consumer confidence and strain global supply chains as restrictions tighten. This uncertainty could exacerbate the impact of the coronavirus on hard-hit sectors like tourism, and arts and entertainment.
Here’s our best-case scenario: The omicron variant will be a blip, presenting a negligible setback in the Canadian economic recovery. Our worst-case scenario? We will return to lockdowns, pushing recovery further into the future.
Inflation
Inflation in Canada, as with other nations, is on track to reach the highest level in nearly 20 years. While high inflation came about in part because of base-year effects, or the comparisons to the low price levels of 2020, the actual number is even higher than expected.
Supply constraints and surging demand are primarily responsible for high inflation. Natural gas and oil production, which had been falling for years, could not keep up with the release of pent-up demand in a reopening economy.
The current increase in inflation is being driven largely by volatile sectors like gasoline, food, shelter, utilities and transportation. Excluding food and energy, inflation looks much more moderate, at 3.3%.
Inflation is projected to return to the 2% target toward the end of 2022.
While inflation remains a primary risk to growth and can lead to rising wages, which further increase businesses’ cost of operation, it is projected to return to the 2% target toward the end of 2022.
The new RSM Canada Supply Chain Index currently stands at 1.75 standard deviations below zero, indicating stress in the supply chain, but it is up from the low earlier this year.
Though much can still change, there are signs that the worst of the supply chain bottlenecks might soon pass. The manufacturing outlook is optimistic, buoyed by strong demand and a smoother supply chain.
The resolution of the supply chain disruptions will depend on many factors, including increasing energy production, mass vaccinations in global manufacturing hubs like Vietnam and India, resolving logistics, and addressing the shortages of important workers in the supply chain like truck drivers.
The labor market
The signs of an uneven recovery are the most jarring in the labor market. Employment has surpassed the pre-pandemic level and will continue to rise steadily in 2022.
Similarly, the labor force participation rate has returned to or has surpassed the pre-pandemic level for most age groups.
But a closer look reveals a much more complicated picture: We are in a tight labor market with many vacancies in highly sought-after jobs while long-term unemployment persists.
The gains over the past two years have been entirely in sectors that were able to pivot to remote work, and in government and public administration.
The gains over the past two years have been entirely in sectors that were able to pivot to remote work, and in government and public administration.
Jobs in professional services, for example, jumped by nearly 10%, outpacing any other sector. These sectors are projected to remain strong, though with less aggressive growth rates.
In contrast, sectors that have taken serious hits include those that rely heavily on in-person services like accommodation and food services, and in goods-producing sectors because of supply chain disruptions.
With easing pandemic restrictions, these hard-hit sectors might bounce back in 2022, constrained by a limited supply of labor and uncertainty surrounding the pandemic.
A lasting challenge for Canada lies in its aging workforce. For years, Canada relied on immigrants for a steady labor supply. But in 2020, Canada’s population growth dropped to the lowest rate since 1916 because of the pandemic-induced border shutdown. With immigration projected to increase in 2022 as borders open, the labor market might see some easing.
The simple truth is that Canada does not have enough young people to replace its retirees. Significant investments in productivity and automation will be required to reduce the labor shortage.
Despite a hot labor market, unemployment remains above the pre-pandemic level because of a skills mismatch. Those with a postsecondary education or above have benefited. At the same time, the number of jobs for those without a postsecondary education has yet to return to the level of February 2020, before the pandemic.
This exacerbates inequality between the two labor markets: one serving the struggling traditional economy versus one that rides the rising wave of the digital economy. Those with skills in demand will see their wages increase as businesses seek to attract and retain talent.
As millennials reach leadership positions and Gen Z enters the labor market, the fundamental demographics of the workforce are shifting. A workplace that values mobility, flexibility and digital skills—not to mention sustainability—will become mainstream.
The housing market
The residential housing market in Canada skyrocketed in 2021 as households shifted spending from services toward housing, aided by generous federal support.
The current housing crunch comes after more than a decade of restricted building, leading to chronic undersupply.
The current housing crunch comes after more than a decade of restricted building, leading to chronic undersupply. Though investors play no small part in heating up the market, 2022 may see a market plateau or cooldown rather than a burst.
Construction is slowing because of a shortage of materials and labor, but it is projected to pick up again next year. Since there is a lag between housing starts and sales, it will take a couple of years for the current construction boom to meet strong demand.
The upcoming years will see the real estate industry adapt to an endemic COVID-19 world. Demand for residential real estate will remain elevated, and construction will shift toward more residential and fewer commercial projects to accommodate the changing environment.
The takeaway
This past year has been characterized by an uneven recovery that is slower than expected. Next year, Canada will transition from living in a global pandemic to an endemic. The movements of COVID-19 will still cause fluctuations in the economy, though with less severity.
Through it all, we expect a year of strong growth as demand at home and abroad remain robust. As government support wanes, challenges remain in making the investments to increase productivity and innovation to stay competitive in the global market.
