Published: 19 January 2022
Canada has seen a steady recovery, growing by around 5% over the course of 2021. The economy will have more than recouped all of the lost output from Covid by the end of 2021. The employment picture is slightly different in that unemployment is still higher than pre-pandemic levels. On the positive side, the regaining of these jobs should provide momentum into 2022. Although Omicron infections have been rising rapidly at the end of last year, the Canadian vaccination rate is very high. Assuming no further disruption, the Canadian economy is expected to have solid momentum in 2022 which is forecast to provide a similar level of growth at around 4.7%.
The movement of oil prices tends to have an outsized impact on the fortunes of the Loonie (Canadian Dollar). We have seen some wild gyrations in oil prices over the last year, though the current level in the high 80 dollar range has been positive. There are forecasts for Oil to increase above USD100 per barrel which would provide further support for Canada.
Inflation data from Canada is following a similar path to other major economies, with consumer prices rising 4.7% in the October and November data. This is the highest rate of inflation since February 2003. The main drivers of growth have been household spending and exports, and the whole picture was improved by the phasing out of Covid restrictions. Markit’s recent manufacturing PMI saw a “robust rate of growth”, though “severe supply constraints persist”. Recent data shows house prices stagnating at the end of the year.
Following the snap elections in which Prime Minister Trudeau tried to shore up the Liberal Party’s minority government, things have been quieter in Canadian political circles. The snap election, which Trudeau tried to cast as a referendum on his government’s handling of the pandemic and its ability to lead the country into the post-pandemic era, was met with apathy by the voting public and, in the end, solved very little.
Trudeau’s failure to make any electoral gains in western Canada led to his failure to secure a majority government for the second-straight election. This has led to ongoing speculation about whether he will step aside as Liberal Leader and hand the reins over to Finance Minister Chrystia Freeland.
There has been much talk of changes needed within government support for small and medium-sized businesses. A very small percentage export their goods and services outside of Canada and moves are seen as necessary to insulate the economy from a move away from fossil fuels.
With headline inflation at the highest since 1987, the Bank of Canada is making similar noises to other major central banks around having to raise rates. We have not seen any change in the interest rate since early 2020 and currently, markets are only pricing in a single hike from 0.25% to 0.5% over the course of this year. The Bank of Canada (BoC) still believes that the inflation risks are temporary.
The BoC would be more likely to raise interest rates more quickly on the back of heightened wage inflation concerns. So far there has been little evidence of persistent wage growth. 2023 could see Canadian interest rates rise by more, prompted by the ongoing recovery and more domestic sources of consumer price inflation, but even then the central bank will act cautiously so as to not undermine the recovery for future years.
Bank of Canada Governor Tiff Macklem recently gave a speech covering “building on success”, celebrating the accomplishment of the BoC’s Monetary Policy Framework. Over the last 30 years, they have kept inflation “very close to 2% on average”. The timing was unfortunate as inflation moves well above this level and the policy framework is renewed, which happens every five years.
The loonie has had a relatively calm quarter, with has also been hampered by supply disruptions, while the currency has not been buoyed by rising oil prices. Against the pound, the loonie has held in a tight range between 1.70 and 1.75 with a similar range being the average forecast. Political and supply uncertainties give rise to a wide range of forecasts, with the majority being for a stable to appreciating Canadian dollar.
The loonie has had a relatively calm quarter, with has also been hampered by supply disruptions, while the currency has not been buoyed by rising oil prices. Against the pound, the loonie has held in a tight range between 1.70 and 1.75 with a similar range being the average forecast. Political and supply uncertainties give rise to a wide range of forecasts, with the majority being for a stable to appreciating Canadian dollar.
An expert analyst with ten years experience will provide a detailed Business Exposure Report. The health check evaluates your business’s ability to meet FX volatility challenges and provides actionable plan for your business.
The European Union has had a tough winter so far with Covid restrictions as a result of the Omicron wave. The Economy finished the year strongly with expectations of a positive year, though the ECB may have to take some action on rapidly increasing inflation.
The US has been working on many fronts, internationally with Russia and China, and domestically with an increased fiscal spending plan. The economy has been growing strongly, prompting action from the Fed, though masses of Covid cases may halt the recovery.
Australia has been trying to return to normal with reduced restrictions and higher vaccine rates. It hasn’t been plain sailing, with current Omicron cases at record levels. The economy has been making up ground, with inflation lower than most major economies.
New Zealand is now among a small number of countries with major travel restrictions in place and relatively low levels of Covid cases. With vaccinations now at high levels, there is a path to normalisation with the central bank raising rates as inflation picks up.
Recent data shows that the UK economy regained its pre-pandemic size at the end of November. Supply disruptions, falling unemployment and rising inflation will continue to be themes for the year, with the rate hike by the Bank of England unlikely to be the last.
