Economic forecasts still muddied by virus, inflation

By Maddie Johnson | November 22, 2021 | Last updated on November 22, 2021
3 min read
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The tug of war between Covid-19 and the economy will continue into 2022, but the global economic outlook remains strong, CIBC’s deputy chief economist says.  

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Given the World Health Organization is fretting about what to do when they run out of Greek letters to name new virus variants, CIBC’s Benjamin Tal said in a recent interview, we have to live with the possibility of another wave. Several countries in Europe have introduced new restrictions in attempts to manage rising case counts.

However, Tal predicts that 2022 will be the year the world shifts from a pandemic situation to an endemic situation as countries will “have to learn to coexist with the virus.”

“I think it’s reasonable to assume that the strong economic growth that we expected in the second half of 2021, that didn’t really happen due to Delta, might happen in the spring and summer of 2022,” he said. “Let’s pray and hope that’s the case.”

If all goes accordingly, Tal predicts overall economic growth to be relatively strong in 2022 — around 4% — with a significant increase in spending fuelled by consumers. 

Tal also hopes to see an increase in business spending, as investment could lead to economic growth and would compensate for the lack of support coming from the government.

A decrease in government support could also lead to some acceleration in job creation, Tal said, and offer a solution to persistent labour shortages. 

“The minute that stops, as we have seen in other countries, many [people] will come back to the labour market,” said Tal.

The Canadian economy added 31,000 jobs in October, bringing the national unemployment rate to a pandemic-era low. However, Tal said we still “need to see more job growth and the decline in the unemployment rate.” 

Job vacancies also remained high at the start of the fall season, particularly in sectors heavily affected by the pandemic. 

Labour shortages are contributing to higher wages, which are a factor in rising inflation. No one knows the path of inflation, Tal said, but wages, rising demand, and disrupted supply chains are likely to keep inflation above central bankers’ 2% target.

Although the Bank of Canada and the Federal Reserve “will be tolerating this kind of inflation, they also will start to raise interest rates in order to get ahead of the curve,” Tal said.

Markets now expect the Bank of Canada to hike rates six times next year and once in 2023, he said, which would be “a very, very significant adjustment to monetary policy.”

Tal is predicting a more gradual rise: three hikes from the BoC next year and three more in 2023, with the overnight rate reaching between 2% to 2.5%. Moving too quickly could “can derail the economy,” he said.

“Remember the enemy of the economy is not higher rates, it is rapidly rising interest rates,” he added.

As for inflation, Tal expects the rate to remain above 3% next year before going back to roughly 2% or 2.5% by 2023.

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for since 2019.