November 29, 2022
Luxury
RYPM
David-Alexandre Brassard, CPA Canada’s chief economist,
looks back on some of the major developments of 2022—and how they affected the
economy
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.
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 percent
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 percent of the 400 billion cubic meters 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 percent and it was approaching five percent
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 percent, 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 percent year over year). The rise in
food prices (up 10 percent 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 percent compared to 0.25 percent 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 percent during the pandemic. Since then, they have dropped by an
average of 10 percent to 15 percent, 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 labor 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 percent to 6.5 percent. 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.
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