Prices are rising at a faster rate than we’ve seen in nearly 40 years. First flagged as a temporary problem, central banks are tackling this problem head-on with tighter monetary policy. Expectations are now aligned on the rapid reduction of quantitative easing programs, earlier and faster interest rate hikes and possible balance sheet reductions. Financial markets and consumers have therefore braced for imminent access to more restricted financing. A risk to the outlook is that the current demand-driven price growth will spill over into wages and other contractual arrangements, which will be harder for central banks to neutralize or reverse without tighter monetary action.
Fiscal policy should also become tighter. It won’t just be in Canada; almost all countries in the Organization for Economic Co-operation and Development (OECD) will be in the same situation. The pandemic stimulus has inflated debt far beyond previously acceptable limits and governments around the world will be under pressure to roll back the stimulus and put their finances on a more sustainable path before rising interest costs exacerbate the problem. Fortunately, they will be able to do so at a time of economic strength, which will at least help on the revenue side.
International trade generally benefits from a strong global economy and as a result, Canada has experienced meteoric growth in the final months of 2021. Pent-up demand will fuel business activity throughout 2022 and 2023, especially as supply chain constraints begin to decrease towards the middle of the year. Protectionism, in its many overt and more subtle forms, should gradually give way to strong demand conditions. There is certainly enough activity for everyone for at least the next two to three years.
It all adds up to some impressive prediction numbers. Developed markets are expected to grow well above their long-term trend, collectively increasing by 4.1% this year and 3% in 2023. Emerging markets will similarly see impressive growth in the wake of the rebound in the last year, rising together by 5.3% in 2022 and another 5% next year. This puts global growth in 2022 at a solid 4.8%, which will then moderate to a still high 4.3% for 2023.
Demand conditions will keep commodity prices higher than initially expected and certainly higher than long-term sustainable levels. The price of West Texas Intermediate crude oil is expected to average US$71 this year and US$65 in 2023. Gas prices will follow the same trend, moving away from current highs as supplies from Western Europe tighten. will reconstitute. Copper prices will face continued upward pressure due to immediate supply constraints and increased structural demand due to a stronger global drive to switch from fossil fuels to forms of power generation and cleaner, copper-intensive transportation systems. Copper prices are expected to average US$8,997 this year and then decline slightly to US$8,287 in 2023.
Rising commodity prices put upward pressure on the Canadian dollar, although this is somewhat offset by shifts in expectations for monetary policy moves here and elsewhere. The Bank of Canada was initially more hawkish in its policy actions, increasing the value of the loonie against the US dollar and the euro. But with the Federal Reserve and European Central Bank now announcing tighter monetary measures, the Canadian dollar has eased and is now expected to average US$0.79 this year and US$0.80 in 2023.
The bottom line?
Pandemic-fueled uncertainty has created broad expectations of a slow recovery. On the other hand, growth is booming. Taken by surprise, global companies are scrambling to increase production to meet demand. Supply chains, normally fine-tuned, are a mess, but will soon pull themselves together. Inflation, perhaps the clearest signal of the economy’s strength, will moderate as central banks take action. At the same time, the effects of the Omicron variant threaten to retard the progress of the economy and perhaps create space to better prepare for the inevitable resumption of activity. It’s all a bit chaotic, but the main story is good: there are obvious rewards for those who are better prepared to deliver the goods over the next two years. Check out the latest news from EDC Economics Global Economic Outlook and discover more valuable information.