Surging COVID-19 cases fuelled by the Omicron variant have forced many economists to reconsider their predictions for the Canadian economy in 2022, but it’s not the only shock that could throw a wrench into forecasts.
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Economists at Capital Economics say COVID-19 is just one of five potential unknowns that could disrupt their forecasts for this year. Here’s a rundown of what they’re watching in 2022.
1. The pandemic
The current Omicron wave is likely to recede as fast as it came on, but more variants are bound to pop up, forcing governments to act with further restrictions. And even though strong lockdowns could very well be a thing of the past, subsequent waves could inflict damage on the economy.
“Future outbreaks could still be disruptive for other reasons, such as widespread absenteeism from work,” senior economist Stephen Brown said in a note.
Indeed, staff shortages are currently wreaking havoc on the Canadian health-care system. Hospitals across the country are closing because staff are calling in sick. On Thursday, long term-care homes in Ontario reported worker shortages of 20 to 30 per cent. Municipal services are also taking a hit; Toronto Public Library said this week it is temporarily closing 44 branches amid rising staff shortages.
2. Household savings
Capital Economics expects the household savings rate to fall this year. The unknown is by just how much. A decline in savings weighs into how much Canadians will spend, which is seen as a key indicator of the economy’s health. The economists expect the savings rate to fall to 6 per cent in 2022. That’s still higher than the pre-pandemic rate of 3 per cent. But then again, Canadians may end up saving more if lockdowns keep them close to home and hoarding their cash.
3. Housing market
Canada’s housing market has been flying high for a long time and 2021 saw the market heat up further. Data on Thursday showed prices and sales broke records last year in Toronto and Vancouver, the country’s two most expensive markets. The average price of a house in Toronto climbed to $1,095,475, a 17.8 per cent jump from the previous record set in 2020. Vancouver saw its benchmark hit $1.23 million.
Capital Economics believes rising mortgage rates will cool home price inflation this year. But there’s a scenario where investors expect prices to keep climbing no matter what, adding fuel to the market — and the economy — as buyers use equity in existing property to purchase more. That spells trouble down the line.
“While both house price inflation and GDP growth would be stronger than we assume in this scenario, we would become extremely concerned about the risk of a house price bust in later years,” Brown said.
4. Immigration
Economists will be watching the rate of immigration in 2022. Capital Economics predicts GDP will grow by 3.5 per cent this year, lower than the Bank of Canada’s estimate of 4.3 per cent. But GDP growth could be affected by how many new migrants enter the workforce. Explained Brown: “Our forecasts assume immigration remains lower than the official targets imply in 2022, which is another reason for our below-consensus GDP growth forecast.”
5. Productivity
Finally, GDP could come in stronger than Capital Economics expects if productivity bounces back. The economists say in theory, the environment is ripe for productivity growth amid business investment in technology during the pandemic and continued labour shortages. But they’re betting it will still take some time before growth actually takes off.
Along with lower-than-consensus GDP growth, Capital Economics is forecasting a drop in oil prices from US$80 to US$57 later this year. They say that will push inflation down to a forecasted 3 per cent, instead of the Bank of Canada’s estimate of 3.4 per cent. From there, the economists see the Bank of Canada hiking interest rates three times to 1.00 per cent by the end of the year. All that will affect the loonie. They see it falling to US$0.76 by the end of 2022.
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