WIDESPREAD DEMAND-SUPPLY IMBALANCES AND RISING PRICES BUFFET THE ECONOMIC RECOVERY - B.C. ECONOMIC REVIEW AND OUTLOOK
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WIDESPREAD DEMAND-SUPPLY IMBALANCES AND
RISING PRICES BUFFET THE ECONOMIC RECOVERY
B.C. ECONOMIC REVIEW AND OUTLOOK
December 2021 Ken Peacock Dr. David Williams
Chief Economist Vice President of Policy
& Senior Vice President
B.C. ECONOMIC
REVIEW AND OUTLOOK
DECEMBER 2021
WIDESPREAD DEMAND-SUPPLY IMBALANCES AND
RISING PRICES BUFFET THE ECONOMIC RECOVERY
H I GHL I G HTS
•Global GDP growth is projected to be 6.5% in 2021, 4.3% •With CPI inflation trending close to 5% and proving to
in 2022 and 3.4% in 2023. While the direct economic be “non-transitory”, the Bank of Canada has with some
impact of the pandemic is fading, widespread demand- reluctance shifted its tone and timeline for the winding
supply mismatches are unsettling the pace of the recovery down of monetary policy stimulus. As well, most federal
and contributing to persistent inflation in many countries emergency supports expired in October. As these policy
(including Canada). The period of ultra-loose fiscal and interventions are unwound, Canada’s recovery may be
monetary policy is coming to an end. heading into choppy waters.
•U.S. GDP growth is expected to be 5.6% in 2021, 3.9% in •B.C. real GDP growth is now forecast to be 5.0% in 2021
2022 and 2.7% in 2023. The downward revisions for 2021 and 4.0% in 2022. The robust pace of growth is expected
and 2022 are due to the global factors listed above, the to ease in 2023 with the economy downshifting to a more
ebbing effects of the Biden Administration’s massive fiscal average growth rate around 2.6%.
packages, and disruptions caused by the Delta variant wave.
U.S. inflation is tracking well above 4% y/y, increasing the •Some moderation in current economic indicators and the
likelihood that the Federal Reserve will tighten monetary provincial floods have prompted a downward revision to
conditions sooner than previously expected. B.C.’s outlook.
•The outlook for Canada’s GDP growth is modestly lower •The full reopening of the economy will result in strong gains
than assumed in our last report, at 5.1% in 2021, 4.3% in 2022 in consumer spending on services, even as spending in
and 3.7% in 2023. Canada is grappling with widespread retail stores softens.
demand-supply mismatches and rising prices that are
sapping some of the recovery’s initial strength. •The steady if somewhat sporadic recovery in international
tourism is also a positive tailwind for the provincial
•Canada’s unemployment rate is significantly higher than economy.
that of peer countries. Ultra-loose fiscal and monetary policy
has been needed for longer to try to reduce labour market •We expect private sector hiring to strengthen in 2022, with
slack, but comes at a cost of exacerbating other economic gains spreading to hard-hit sectors as well as ones where
imbalances such as the current credit boom causing higher employment has recovered.
established house prices.
•Risks to the outlook are mostly on the downside stemming
from the Omicron variant, sustained inflation and sooner-
than-expected interest rate hikes.
GLOBAL ECONOMIC RECOVERY respectively (Table 1). High rates eliminated globally by the end of
LOOKS INCREASINGLY CHOPPY AS of vaccinations are facilitating the 2022, and in Canada’s case by the
INFLATION PRESSURES BUILD reopening and recovery in advanced end of 2021.
economies, while vaccination rates
Global GDP growth is expected to The global recovery is exhibiting
are lagging in emerging economies.
rebound from the brief 2020 slump choppiness as rising demand for
The Bank of Canada assumes most
to reach 6.5% in 2021 before easing goods and services encounters
public health restrictions will be
to 4.3% and 3.4% in 2022 and 2023, widespread supply-side problems
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REVIEW AND OUTLOOK DECEMBER 2021
including: shortages and escalating TA BL E 1 : G LO B A L E CO N O M I C F O R E C AST
costs of production materials (e.g. ( A N N UA L % C H A N G E I N R E A L G DP )
semiconductors); high shipping costs
and long delays; increasing costs for 2020f 2021f 2022f 2023f
carbon mitigation; and insufficient
World -2.2 6.5 4.3 3.4
global energy supply (affecting
Europe, China and the United U.S. -3.4 5.6 3.9 2.7
Kingdom particularly).
Euro area -6.5 5.3 4.5 1.9
With the pandemic fading, and
inflation rising, many central banks Japan -4.7 2.5 3.0 0.1
(including Canada’s) have signaled China 2.3 7.9 5.3 5.9
their intention to throttle back on
monetary stimuli. Extraordinary Canada
monetary policy measures adopted
Potential GDP 0.8-2.0 0.8-2.2 0.4-2.2 1.0-3.0
since early 2020 have included
ultra-low policy interest rates, Actual GDP -5.3 5.1 4.3 3.7
forward guidance about the future
path of policy interest rates, and
quantitative easing (i.e. buying CPI Inflation 0.7 3.4 3.4 2.3
government and other bonds to f - forecast
artificially push down their yields). As Source: Bank of Canada.
was the case following the 2007-09
Global Financial Crisis (GFC), how
prospect of a U.S. recession within sapping some of the recovery’s initial
economies adjust to the end of
two years as consumer and business strength.
“cheap money” is an open question.
confidence ebbs.
The adjustment may be bumpy. In the labour market, as noted in
our previous BCERO, the federal
The U.S. economy is expected to
government in our view made
grow by 5.6% in 2021, 3.9% in 2022 POLICY INTERVENTIONS,
a policy error by ramping up
and 2.7% in 2023. The modestly SUPPLY-DEMAND MISMATCHES
immigration targets at a time when
lower U.S. outlook for 2021 and 2022 AND RISING PRICES BUFFET
labour demand was in recession and
is due to some of the global factors CANADA'S RECOVERY
struggling to recover. At a stroke, the
listed above, the fading effects of the The outlook for Canada’s GDP government moved the goalposts
Biden Administration’s massive fiscal growth is modestly lower than in on closing the labour market gap.
packages, and disruptions caused our previous BCERO report at 5.1% The federal government is stoking
by the Delta variant wave. The in 2021, 4.3% in 2022 and 3.7% in labour supply on the one hand,
Federal Reserve’s preferred inflation 2023 (Table 1). After a slow start, forcing the Bank of Canada to keep
gauge, the personal consumption Canada’s vaccination rate ramped its extraordinarily loose monetary
expenditure (PCE) price index, is up quickly during the middle of 2021, policy in place for longer to stoke
running at 4.4% y/y. America’s CPI enabling a swifter-than-expected labour demand on the other. The
is even higher at 5.4% y/y. High reopening of the economy. With 86% consequence of Canada’s policy
inflation, and the Fed’s response to of the eligible (aged 12+) population discoordination is that the labour
it over the next 2-3 years, will bear vaccinated, Canada has one of market is in overall excess supply,
on Canada’s recovery given the the world's highest vaccination even as there are widespread labour
strong trade and financial linkages rates. Nonetheless, the economy demand-supply mismatches.
between the two countries. Risks is now grappling with the effects
to the U.S. outlook are weighted Canada’s unemployment rate was
of numerous policy interventions,
to the downside in our view. Some 6.7% in October, still considerably
widespread demand-supply
economists are even raising the higher than many other advanced
mismatches and rising prices that are
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REVIEW AND OUTLOOK DECEMBER 2021
F IG URE 1: CANADA FAC ES BR OA D -BASED C PI P R E SS U R E S
Consumer price index (CPI), major categories, % y/y change to Oct 2021, Canada
Weight in CPI basket
Transportation 15%
Shelter 30%
ALL ITEMS 100%
Food 16%
Recreation, education and reading 10%
Health and personal care 5%
Alcohol, tobacco and cannabis 5%
Household operations, furnishings and equipment 15%
Clothing and footwear CPI target = 2% 4%
0 2 4 6 8 10 12
% y/y change to October 2021
Source: Statistics Canada.
countries such as New Zealand, Having initially dismissed high B.C. GROWTH OUTLOOK TRIMMED
Australia and the United Kingdom inflation as “transitory”, the Bank has Consistent with the Canadian outlook,
that acted pragmatically to scale reluctantly had to shift its inflation B.C.’s growth prospects are scaled
back immigration targets while outlook, communications tone, and back, but the economy will continue
labour demand was weak. We worry policy stance. It has also announced growing at a solid pace. Demand-
that hardship lies ahead for many the immediate end of quantitative supply mismatches are proving
jobseekers, especially newcomers, as easing. The Bank now expects more disruptive and pervasive and
federal emergency supports continue monthly CPI to run at an annualized are impacting production and the
to be dialed back. At the same pace of just under 5% over the shipment of goods in some sectors.
time, the extended period of ultra- balance of 2021 and to ease towards The slowing in retail spending,
cheap debt has come at the cost its target of 2% by the end of 2022. downturn in building permits
of exacerbating other longstanding Calendar year average forecasts for and softer gains in private sector
imbalances around indebtedness and CPI are 3.4% for 2021, 3.4% for 2022, employment also suggest growth is
house price inflation. The potential and 2.3% for 2023 (Table 1). easing in the final quarter of the year.
for a disorderly unwinding of these Overall, Canada’s outlook features
imbalances is a key risk to Canada’s The flooding that devastated
modestly downgraded forecasts for
medium-term economic prospects. B.C. communities in November,
economic growth, higher-for-longer displacing families and businesses
Similarly, inflation pressures are CPI inflation, and an earlier scaling and severing critical transportation
widespread across provinces and back of ultra-loose monetary policy. connections, has also necessitated
spending categories. Consumer price Federal fiscal policy will also be a downward recalibration. While
inflation (CPI) in Canada reached tightened as emergency supports are the full extent of the damage and
4.7% y/y in October, well above the scaled back. With the emergence of how long it will take to repair key
pace of nominal wage growth and the omicron variant, risks to Canada's transportation infrastructure are
the Bank of Canada’s 1-3% per annum GDP outlook are weighted to the uncertain, the impacts from the
inflation control range (Figure 1). downside.
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REVIEW AND OUTLOOK DECEMBER 2021
flooding disaster are localized but
are also reverberating through the TA BL E 2 : B .C . E CO N O M I C O U TLO O K ( B C B C F O R E C AST)
( A N N UA L % C H A N G E U N L E SS OTH E RW I S E I N D I C AT ED)
economy -- compounding supply
chain issues. The flooding will likely
shave another two or three tenths of 2020 2021f 2022f 2023f
a percentage point off of real GDP Real GDP -3.4 5.0 4.0 2.6
growth in 2021. Adding it up, we now
expect real GDP growth to reach 5% Employment -6.5 7.2 3.2 2.2
for 2021, down from our previous
Unemployment rate (%) 8.8 6.5 5.4 5.0
5.8% projection (Table 2).
Housing Starts (000 units) 38.0 47.5 45.0 42.0
The weaker-than-expected handoff
going into next year is also Retail sales 1.3 13.5 6.0 6.2
prompting a downward revision
for 2022, with B.C.’s real GDP now B.C. CPI 0.8 2.8 3.5 3.5
forecast to rise 4% (rather than 4.5%). f - forecast
Although repairs and rebuilding from Source: Statistics Canada and B.C. Stats; Business Council of B.C. forecasts.
the flooding will extend through
much of 2022, transportation and is on track to post only modest back from this high mark, but the
connections should be fully restored gains in the first half of 2022. The elevated level of construction activity
in a few weeks and have a limited pace of car purchases slowed after will carry into 2022 and contribute
impact on the annual top line growth a large jump earlier in 2021 and the to the province’s above average
number. surge in spending at building supply economic expansion. Even modestly
There is more uncertainty regarding stores is also ebbing. Substantially higher interest rates will significantly
2023. By then, we assume that higher higher energy and food price are also erode affordability and dampen
borrowing costs will dampen housing headwinds for B.C. consumers. housing activity in the second half of
activity and weigh on consumer the year, leading to some pull-back in
As noted previously, the 2020
spending. Global growth will also residential construction activity.
COVID downturn differed from
moderate. The provincial economy is other recessions because consumer
expected to downshift to its longer- spending on goods held up but MORE UPSIDE FOR B.C. EXPORTS
term average growth rate of around spending on services tumbled.
2.6%. With the economy fully reopening, Exports have supported B.C.’s
consumers spending on services recovery since mid-2020. Wood
The heightened uncertainty over
will resume for activities that were and energy products have posted
the new Omicron COVID variant,
curtailed or even non-existent over the strongest gains, but all export
how quickly international travel
the past 20 months. A promising product categories are up in 2021.
might resume, escalating inflation,
sign is that in the third quarter of Broadly-based gains and buoyant
and policy missteps identified in
this year, spending in full-service global commodity markets point to
the previous section make growth
restaurants regained (and slightly additional export growth, if at more
forecasts more of a moving target
surpassed) its pre pandemic level moderate pace.
than usual. These factors also tilt
most of the risks to our outlook to (Figure 2). Wood product exports now account
the downside. B.C. home re-sales surged to record for 25% (one in every four dollars) of
highs in 2021. In response to strong all provincial merchandise exports.
demand for home purchases (and the The integrated pulp sector makes up
SPENDING ON SERVICES TO BOOST another 8% of B.C.’s goods exports.
pushing out of some of new housing
CONSUMER EXPENDITURES Energy accounts for another 25% and
projects from 2020 to 2021), housing
We have trimmed B.C.’s outlook in starts are on track to reach a new mined metallic and mineral products
part because spending in retail stores annual high of nearly 48,000 units. In for 13%. Combined, natural resource
levelled off sooner than anticipated 2022, the number of starts will move products that mostly come from the
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REVIEW AND OUTLOOK DECEMBER 2021
F IG URE 2: SALES AT F U L L-SERV I C E R ESTAU R A N TS R E COV E R
B.C. food service sales, monthly SA, $ millions Q3 food service sales, $ millions
1200 1,900
full service limited service
1100 1,800
1,700
1000
1,600
900
1,500
800
1,400
700 1,300
600 1,200
500 1,100
1,000
400
Jan 17 Jan 18 Jan 19 Jan 20 Jan 21 900
2016 2017 2018 2019 2020 2021
Source: Statistics Canada, Table: 21-10-0019-01. Latest September 2021. SA=seasonally adjusted.
province’s Crown land base make up we expect the B.C. economy to transportation and logistics sector
nearly 75% of all provincial exports. downshift towards a more “average” to run full out in the coming year as
This statistic underscores the reality growth performance over the product shortages are addressed and
that natural resources still dominate medium term. supply chains repaired.
B.C.’s export mix, even though the That said, an anticipated ongoing
overall economy has diversified upswing in the value of service
significantly in the past 2-3 decades. MORE PRIVATE SECTOR HIRING
exports will help keep the near-term NEEDED
Further into the forecast horizon, we expansion on a solid footing. Tourism
believe the forest sector’s economic is normally one of the province’s Over the course of the shut-down
contribution will shrink. The pine largest industries and a key source of and re-opening, B.C.’s employment
beetle has already led to curtailments export revenue. Our forecast builds recovery has been comparatively
in harvestable timber. The province’s in a modest but steady return of strong. Employment levels, however,
recent announcement that it intends international travel. This assumption are still below pre-pandemic levels in
to defer logging in 2.6 million could prove too optimistic, as many nine of 16 broad industry categories.
hectares of old growth forests will countries are now implementing The aggregate job numbers have also
compound existing fibre shortages international travel bans and closing been notably bolstered by frenzied
and result in the closure of another their borders as the Omicron variant public sector hiring while hiring in
10-15 sawmills and potentially spreads across the world. At this the private sector remains more
1-2 pulp mills. It will also prompt stage we still expect a gradual revival modest.
forest companies to accelerate the of international travel to contribute Our 2022 growth forecast is
redirection of investment dollars to B.C.’s economic growth in 2022. predicated on a pick-up in private
to other jurisdictions. The large We will revisit this issue in our next sector hiring and a more fulsome
and widespread negative economic quarterly update. recovery in all industry sectors,
impacts flowing from the provincial especially the hard-hit consumer
Rapidly growing demand for new
government’s policies regarding facing ones. An important potential
streaming content is a plus for B.C.’s
forestry as well as other land-based headwind to faster private sector job
large and vibrant film and television
industry sectors is one reason why creation, however, is rising payroll
production industry. We expect the
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REVIEW AND OUTLOOK DECEMBER 2021
costs. The provincial government other non-permanent residents also become a drag on B.C.’s economic
just announced a minimum of 5 tumbled, resulting in the previous growth rather than a lift later in the
days mandatory paid sick days net inflow of 25,000 temporary forecast horizon
for all employees. B.C. employers residents to switch to a net outflow
will have to either absorb or pass of roughly the same magnitude.
on the additional costs, which Rather than growing by the usual SUMMARY
are on top of escalating payroll 1.6% - 1.8%, B.C.’s population grew This year the provincial economy
levies like the Employers’ Health by just 0.5% in the second half of benefited from buoyant commodity
Tax, higher CPP contributions, and 2021. The resumption of more normal markets and a reviving global
significant increases in the maximum immigration flows (and positive net economy. The same dynamic
pensionable and maximum insurable interprovincial migration) should generally will continue, with more of
earnings thresholds under both the help to boost economic growth a lift coming from service exports.
CPP and the Employment Insurance in 2022. It is also a reason growth The full reopening of consumer-
programs, respectively. For some eases in 2023: once immigration and facing services will see consumer
employers hammered by COVID- population growth return to more spending rotate back towards
related disruptions and extra normal patterns, the lift to GDP due spending on services compared to
workplace safety costs, the steep to the rebound from abnormally low goods.
jump in government-determined population gains will not be repeated.
In 2023, we expect the economy
payroll charges may be the final
to downshift towards its long-term
straw. We see a risk that job creation
NON-RESIDENTIAL INVESTMENT potential growth rate as higher
in the private sector could slow
LIFT FADES OVER FORECAST interest rates weigh on the finances
appreciably in the next couple of
HORIZON of heavily indebted households.
years.
Higher inflation will also erode
Sharply higher payroll costs In the year prior to and throughout purchasing power and dampen
also come at a time when many the pandemic, construction of large consumer spending.
employers are having more difficulty capital projects has provided a
very large boost to B.C.’s economy. The risks to the outlook are mostly
than usual finding employees. The
Absent the Trans Mountain pipeline on the downside. Higher inflation
job vacancy rate is the highest on
expansion, the building of the LNG could prompt an earlier and more
record. B.C. today also has the
facility in Kitimat, and the Site C aggressive policy response by the
highest vacancy rate of any province,
Hydro project, economic growth Bank of Canada. There is also a risk
with the worst shortages reported in
would have been muted in 2019 that the new COVID variant could
the Thompson-Okanagan region and
and the downturn much larger dampen the anticipated recovery
on Vancouver Island. As pandemic-
in 2020. Ongoing construction of the global economy and deliver
related government supports are
of these massive capital projects a further blow to the province’s
wound down, we expect more
will help sustain growth into 2022, tourism, travel and hospitality
people to return to the workforce.
but after that as these projects sectors.
But even a large bump in the pool of
potential workers will not alleviate enter the final build stages the lift
the high vacancy rates reported in from construction will wane. The
some sectors. profile of non-residential building
permits – spiking in 2019 and then CO-AUTHORED BY
The resumption of stronger returning to more normal levels
population growth will also be a Ken Peacock,
in 2020 – also points to more
source of new workers and is another Chief Economist
moderate construction activity in
reason we expect GDP growth to & Senior Vice President
the years ahead. The pull-back in
stay elevated in 2022. In 2021, the non-residential building permits David Williams, DPhil,
number of immigrants moving to and timelines for the large capital Vice President of Policy
the province slumped by half. The projects means investment spending
processing of temporary workers and and related construction activity will
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