Omicron casts ‘clear doubt’ on economic forecast for 2022: BMO expert

BMO Financial Group’s chief economist told a Greater Sudbury Chamber of Commerce audience to prepare for a “bit of a roller coaster” in 2022 during a virtual event on Tuesday.

But while it might seem like things are a little bit “halting” at the beginning of the year, Douglas Porter predicted a strong economic rebound in the months to come.

Porter, who has over 30 years of experience analyzing global economies and financial markets, shared his expert opinion during the chamber’s Economic Outlook 2022 event, which was held via Zoom on Dec. 14.

During the event, he said that it’s a “very interesting and complex time” to be delivering an economic outlook in the context of the COVID-19 pandemic.

“The dominant story by far has been the supply shortages that we are seeing around the world and the impact that has been having on inflation,” said Porter.

“But the pandemic has come roaring back with a vengeance in the last couple of months, and I have to say that all the uncertainty over the new Omicron variant definitely casts a clear doubt over some of the numbers of forecasts I’m going to give you today.”

He added that economists are assuming the new variant “will throw some sand in the gears of the global economy over the next couple of months,” but nothing close to what the world experienced in the spring of 2020.

“It might still be enough to somewhat frustrate the near-term economic outlook,” he said.

Porter said that supply chain issues have been “far-reaching” this year, but in many respects, supply in a lot of industries is “actually operating at an “all-time record high.”

“We’ve heard everything from turkeys to Christmas trees to Halloween costumes have been affected by supply chain shortages,” he said.

“What’s happening is that we’ve just got this global wave of demand for goods, for stuff that is absolutely overwhelming the existing supply chain. It just can’t keep up with the strength and demand that we’re seeing globally.”

The reason for the demand, he said, is because the pandemic has made it difficult for people to pay for services, so they’ve increased spending on goods instead.

“It’s been tough to go on a trip. It’s been challenging to go see a movie or a Maple Leaf game, so people have been channeling their spending into buying goods,” said Porter.

“Eventually we do think it gets worked out. Many industries are reporting we’re past the worst already in terms of supply chain issues, and many companies believe it will be closer to normal by the middle part of next year.”

Although commodity prices saw a “deep downdraft” in the early days of the pandemic, Porter said they saw a quick recovery through the second half of the year.

“Then on top of that recovery, commodity prices have gone up another 50 per cent this year following the deepest economic downturn of the post-war era,” he said.

“Prices are now 50 per cent higher than before the pandemic began and that, to me, is remarkable.”

Porter said the rise in commodity prices, specifically the price of nickel and copper, bodes well for Northern Ontario.

“Broadly, we’re not in the camp that’s calling for a supercycle or a return to the go-go days of 2007, but nickel is definitely a potential winner from the demand for EVs and batteries. There’s also a relatively robust stainless-steel demand,” he said.

“Copper is the one other base metal that definitely could be in a supercycle here and could do very well over time.”

Porter added that nickel “is a bit of a tougher one to call because Indonesia is such a wild card.”

“They account for about 40 per cent of global production, and sometimes they can really move the nickel price based on the decisions they make,” he said.

“That makes it a tougher one to call, in general, but from the demand side, we think it’s a very positive story.”

Porter said that almost every major economy in the world saw a “nice rebound” this year, but we still have a long way to go before we compensate for the damage of the pandemic.

“Realistically, some of the sectors that are most affected by the pandemic, like travel and tourism and entertainment, won’t be fully back to normal, not completely, even by next year,” he said.

“We don’t think we’re dealing with a completely normal environment until late 2023 or even out in 2024.”

The provinces that got hit the hardest, he added, were oil producers like Saskatchewan and Alberta, while the provinces that did well were the Maritimes and BC.

“Ontario was pretty much close to the middle of the pack. Looking into next year, we think there’s still a bit of ground for Ontario to make up as we had longer-lasting restrictions than many other provinces,” said Porter.

“We tend to grow a little bit faster than the national average, so we see somewhat above-average growth.”

Porter added that there are now more Canadians employed than there were before the pandemic.

“That story about the great resignation hasn’t really applied to Canada. We have not seen a wave of early retirements although there is there is a lot of anecdotal evidence that it’s happened,” he said.

“But in the big broad statistics, it’s not there. In the prime working-age category between 16 and 64, the participation rate is as high as it’s ever been. Canadians have stayed much more engaged in the job market.”

Sudbury’s unemployment rate is about a percentage point above where it was before the pandemic, said Porter.

“I would just treat these numbers with a bit of caution for two reasons. First of all, whenever you drill down to the city level, the numbers do tend to bounce around a lot,” he said.

“The other reason is that they release the city numbers in a delayed fashion – the statistics haven’t really caught up with reality.”

Porter said he suspects that in the next couple of months, the numbers will be even closer to pre-pandemic levels.

The chief economist also addressed rising inflation rates during the virtual event.

“Right now, in Canada, we’re dealing with the highest inflation rate that we’ve seen in 18 years,” he said, adding that he expects November’s inflation rate will be close to five per cent.

“You have to go all the way back to the early 80s to see anything much above that kind of range for Canadian inflation.”

Porter said that he “wouldn’t necessarily lay the blame at the feet of Ottawa,” but the government could help control inflation by “taking their foot off the accelerator.”

“We have consistently been above other forecasters warning that this might last a little bit longer and go a little bit higher than what’s comfortable, but even we think inflation will tend to fade a little bit over the next year,” he said.

“But we think, even by the end of next year, inflation is still going to be higher than it was in the 10 years before the pandemic.”

Porter said that inflation has affected the price of things like natural gas, hotel and motel rates, and airfares, but he characterizes those as “transitory.”

“I get a little bit more concerned that some things might not be just a passing phase, like home prices, meat – and food in general,” he said.

“Lots of folks have been warning that food prices are likely to rise by seven per cent again next year.”

He added that he is “keeping a sharp eye” on the housing market.

“We’ve seen home prices go up by 20 per cent in the past year, and that’s only begun to feed into inflation,” said Porter.

“There’s still a tremendous imbalance between supply and demand in the housing market. It is a seller’s market still. What will be needed to bring this market to heel will be interest rate hikes from the Bank of Canada.”

Sudbury, said Porter, is “right up there with everyone else.”

“According to the latest statistics, Sudbury home prices are up 27 per cent from a year ago. Some of the best gains we’ve seen in the country are in some of the smaller cities in Ontario,” he said.

The Local Journalism Initiative is made possible through funding from the federal government.

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