‘No one expected this inflationary climate to last so long’

Homeowners will be affected by increases in the Bank of Canada’s key rate when their mortgages are up for renewal or when they try to sell their property (Getty Images/ljubaphoto)

When 2022 began, the world was in the middle of the fifth wave of the COVID-19 pandemic. And as the end of the year approaches, many signs are pointing to a recession.

Here, David-Alexandre Brassard, CPA Canada’s chief economist, looks back at how the events of the past year affected the economy—and what we can expect in the upcoming year.

CPA CANADA: The pandemic and the war in Ukraine have dominated the headlines in many parts of the world this year. Where does Canada stand currently?
David-Alexandre Brassard (DAB): The pandemic is more or less behind us. The situation right now is nothing like it was in January, when the Omicron variant took a considerable toll on the economy (200,000 temporary job losses, along with a 10 per cent absenteeism rate). Many workers changed industries in the early waves of the pandemic, leaving the food and accommodation service industries (among others) with staffing shortages. But virus-related absenteeism will be limited going forward.

Right now, it’s the war in Ukraine that is causing the greatest uncertainty globally—especially when you consider, for example, that in 2021, about 45 per cent of the 400 billion cubic metres of natural gas consumed in Europe came from Russia.

Also, wheat and oil prices have doubled and tripled, respectively, compared to their pre-pandemic levels. This is not necessarily a bad thing for Canada, since several provinces (Alberta, Saskatchewan and Newfoundland and Labrador) are producers. This could give them some protection in the event of a widespread economic downturn.

CPA CANADA: To what extent is the war responsible for the inflation we are now seeing in Canada?
DAB: The war is only partly to blame. The pandemic had already set the stage for inflation to take hold. In the summer and fall of 2021, the rate had risen to three per cent and it was approaching five per cent at the beginning of 2022. What no one really anticipated is that it would last so long.

Between June 2021 and June 2022, energy and consumer prices rose sharply, pushing inflation in Canada to 8.1 per cent, a 40-year high. Although the rate has eased somewhat, prices are still rising too quickly and the increases are widespread (prices for items other than energy—such as shelter, transportation and durable goods, etc.—are up more than six per cent year over year). The rise in food prices (up 10 per cent in one year) is particularly worrisome.

CPA CANADA: In this context, what can we expect in the coming months?
DAB: This year we saw a significant increase in the Bank of Canada’s key rate—it now stands at 3.75 per cent compared to 0.25 per cent at the beginning of 2022. It’s been nearly 15 years since rates have been that high and while it’s unlikely that we will see any more major hikes, they will likely remain high in 2023. Interest rates take time to have an impact and we can expect a longer adjustment period to return to an acceptable level of inflation. Just as it takes time for rate increases to have an impact, so too is a period of adjustment needed before we return to an acceptable level of inflation.

Of course, higher rates lead directly to higher borrowing costs for both businesses and individuals. The problem is that housing prices keep going up during the pandemic leading to particularly high prices in British Columbia and Ontario.

Since only a certain percentage of homeowners renew their mortgages each year, many have yet to be affected. However, they will feel the pinch when their mortgages come up for renewal or when they try to sell their property in a market where buyers have less borrowing capacity.

CPA CANADA: How is Canada’s real estate market looking right now?
DAB: Prices in Canada peaked in March 2022 after climbing by as much as 50 per cent during the pandemic. Since then, they have dropped by an average of 10 per cent to 15 per cent, and will likely continue to weaken as new interest rate increases are introduced. After that, they should stabilize somewhere in 2023. Since overheated markets react more quickly to rate increases, prices dropped more quickly. Prices have not adjusted as much or as fast in more affordable markets.

In short, the real estate market continues to be an issue in Canada. And while a lot of investment has been directed toward the sector, we still do not have sufficient housing to fulfill our needs.

CPA CANADA: Are we definitely headed toward a recession in 2023?
DAB: For now, our GDP is still growing and our labour employment market is stable. But forecasts suggest 2023 will bring an economic downturn that could last six months. And technically, a recession is characterized by an economic decline in two successive quarters. So yes, we could indeed be headed toward a recession if the hikes in the key rate (which are intended to tame inflation) have a greater effect than expected.

But if we do see a recession, it won’t be anything like the one we experienced at the beginning of the pandemic. It is estimated that the unemployment rate could rise from five per cent to 6.5 per cent. Professional services firms that can attract remote workers could be better positioned, as should any province or city where a sizeable portion of the workforce is in the public sector (administration, health care, education). On the other hand, organizations offering non-essential services in markets where property prices are high are among those that are likely to suffer. Imagine, for example, a high-end restaurant located outside downtown Toronto or Montreal.

CPA CANADA: What can we personally do to prepare?
DAB: Canadians should put off major spending and use credit as little as possible. They should also upgrade their skills so that they are more employable and can react if needed.

It is always worrisome to talk about a recession, but right now, it looks as if it could be relatively short-lived.

IMPROVE YOUR INFLATION IQ

Learn about inflation and rising interest rates and how to plan your finances with these simple tips. And check out our series of economic briefings by CPA Canada’s chief economist, David-Alexandre Brassard.

Plus, stay on top of key financial issues with CPA Canada’s award-winning financial literacy resources, including the Mastering Money podcast and our innovative financial literacy publications, from surviving unemployment to planning for retirement.