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The Globe and Mail asked dozens of experts about the economy in 2022. Here are the charts they think are important to watch and why

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Decoding 2022: The Globe asked dozens of experts – from economists and strategists to investors and academics – to make sense of the economy in the year ahead. These are the charts they think are important to watch and why.


Monetary policy and inflation

Rates will go up, up, up

Markets are discounting five to six rate hikes in 2022 from the Bank of Canada (125 to 150 basis points). This would be the most in a calendar year in more than two decades.

The potential impacts could be the most significant since 1980. This is owing to hyper-leveraging. The non-financial private-sector debt-to-GDP ratio has doubled over the past 35 years, with much of this occurring over the past decade. Exacerbating the potential for an outsized impact from rate hikes is the continued dominance of residential investment. Despite a recent moderation, this remains more than 9 per cent of GDP. This is more than three standard deviations elevated relative to its long-run average. Such a highly elevated structural imbalance opens up the potential for a severe decline in the aftermath of a rate-hike cycle.

David Doyle, head of North America Economics, Macquarie Group


Overinflated expectations

Investing rule No. 9: “When all the experts and forecasts agree,” Wall Street legend Bob Farrell once noted in his iconic 10 market rules to remember, “something else is going to happen.”

At the moment everything is inflation, inflation, inflation. Yes, it’s a present-day reality. But when it becomes as ingrained as it is, if you’re an investor, it’s safe to say the news is in the price. This is not the 1970s, when inflation came as a big surprise – the chart of Google searches in the U.S. for the word “inflation” shows the exact opposite. The thing is, inflation tied to the pandemic is running at an annual rate of 5 per cent, whereas inflation that has nothing to do with the pandemic and all its side effects (supply-chain issues and so on) is barely running faster than 2 per cent, and lower now than when the COVID crisis began. Go figure!

My bet for 2022 is that the former will converge on the latter, and that a year from now, we’ll be flipping this Google search chart upside down.

David Rosenberg, president and chief economist, Rosenberg Research & Associates (@EconguyRosie)


The good, not-so-good and bad in inflation expectations

When I look at this graph, three messages pop out. First, inflation expectations remain anchored in 2023. That’s good news for the Bank of Canada when it comes to maintaining market credibility. Second, forecasters don’t expect a quick resolution of inflationary pressures. This is the not-so-good news. By the end of 2022, inflation expectations are still above the 2-per-cent threshold, even with prices benchmarked against the high base-year of 2021. For consumers, it’s probably not going to really “feel” like a low(er) inflation environment.

Third, it’s hard to miss the massive and one-directional forecast errors that occurred in 2021. Economists and central banks have been surprised by the strength of inflation and, more importantly, its duration. This is bad news. Even as inflationary pressures ease next year, the duration of elevated prices risks already becoming embedded into future wage expectations and consumer prices.

Beata Caranci, chief economist and senior vice-president, TD Bank (@TD_Economics)


The sectors inflation forgot

It may be hard to believe, but not everything costs more today than before the pandemic. Several items in the U.S. consumer basket are less expensive today, as shown in this chart. That’s because not every item is in short supply and long-run inflation dampeners, such as globalization and automation, are still a force. This means inflation could retreat sharply next year once supply bottlenecks for some items, notably new and used vehicles, ease. The bigger threat then will likely be worker shortages, which may take longer, and require cooler demand, to resolve.

Sal Guatieri, senior economist, BMO Capital Markets


If the Fed is wrong, so are the markets

Although there have been plenty of market pundits claiming the Federal Reserve is wrong in its view that inflation would prove “transitory,” the market has agreed with the Fed’s outlook for inflation. Prior to the COVID-19 crisis, the entire U.S. inflation breakeven curve (the difference between Treasury inflation-protected securities, or TIPS, and nominal bond yields) was below the 2-per-cent inflation target. The market was expecting inflation to average less than 2 per cent over the next 30 years.

In the depths of the COVID-19 crisis, inflation breakevens had collapsed to the point where the market had priced in more than 2-per-cent deflation for the next year and had lowered long-run 30-year inflation expectations to around 1.5 per cent. However, over the course of the next year, that had risen to the point where, on Sept. 1, 2021, the entire curve was above the Fed’s 2-per-cent target. As inflation worries intensified over the next three months, the market raised short-run inflation expectations much more than long-run ones. The market agreed that inflation is “transitory.” During 2022, this chart will be crucial in helping determine if inflation worries move out from that classification. Watch long-term inflation breakevens for clues.

Kevin Muir, strategist, Winter Capital, and author of the MacroTourist newsletter (@kevinmuir)


Misery is a drag

The recent decline in consumer confidence in the U.S. is being driven by high inflation. While unemployment has fallen rapidly, it hasn’t made up for the impact that higher prices are having on consumers’ perceptions of the economy. This is evident in an elevated misery index – the sum of inflation and unemployment, Arthur Okun’s classic formula for tracking a country’s economic stress. Looking ahead, as inflation recedes – thanks to less-rapid advances in commodity prices and because prices were already higher a year ago – consumers are likely to feel more optimistic about the future.

George Pearkes, analyst, Bespoke Investment Group (@pearkes)


Supply-chain pain

Inflation is hard to contain

Far-flung global supply chains are efficient but fragile. The pandemic broke them. Maybe for good.

Policy makers are trying to fix the supply-side problems with demand-side tools. The reality is they can’t. Too much money and not enough to spend it on is a recipe for inflation.

David Wolf, portfolio manager, Fidelity Investments


A wave of relief

Inflation pain is on everyone’s lips, and it’s difficult to pick one single indicator to watch in 2022 as the three-decade-high CPI rate comes from several sources. Climate shocks are increasing the cost of doing business, as experienced with cotton, lumber and agricultural products this year, while the necessary long-term decarbonization transition itself comes with an expensive price tag. The steep structural uptrend for microprocessor demand suggests no end in sight for the current shortage. Meanwhile geopolitical tensions pose an ever-present threat of idiosyncratic price spikes.

But there are also signs of hope for slower, if not lower, prices. Transportation logistics improvements are removing supply-chain bottlenecks, as has the supply response in some materials including oil, lumber and copper. New habits are forming, like the substitution of cheaper items by consumers and businesses, as well as productivity gains triggered by the pandemic.

Then there’s the global Baltic dry shipping index, a benchmark for what it costs to move dry bulk commodities by sea, which spiked sharply in 2021. But as the chart shows, by the end of the year it had started to decline, and that supports at least a more modest rate of increase in the price of goods going forward. Economists wish you lower inflation for the new year.

Sebastien Lavoie, chief economist, Laurentian Bank Securities (@Lavoie_Seb)


Expect significant delays

At the end of 2021, both the aviation and shipping industries exhibited extreme congestion and lack of capacity. This is an important indicator to watch as it signifies the stressed overall supply-chain environment. In aviation, while passenger-flight volumes have begun to recover and trend toward 2019 levels, dedicated airline freight has been stretched to the extreme, both volume and pricing wise. Similarly, shipping transit times have reached new highs as well as wait times for unloading when ships get to port with port congestion. The average transit time from China to Los Angeles doubled from 30 days in January, 2020, to 60 days in August, 2021. Going forward into 2022, we need to be mindful of the potential disruptions of strained supply chains for the economy and in our everyday lives.

David Yu, finance professor at NYU Shanghai and chairman of Asia Aviation Valuation Advisors (@david_yuda)


Too much demand, not enough supply

The supply-chain issues we’re facing are largely owing to a demand shock. Spending on services is almost back to where it should be, but spending on durable goods is 20 to 25 per cent higher than where it should be. To put this in perspective, the increase in spending in the U.S. during the pandemic is equivalent to increasing the U.S. population by 70 million almost overnight. The point is that even a normally functioning supply system would find it difficult to deal with such a demand shock, and of course these are not normal times. Supply-chain issues will continue to be a challenge in 2022 as long as this demand shock persists.

Benjamin Tal, deputy chief economist, CIBC World Markets


Fiscal policy

As deficits go, so goes inflation

Canada’s inflation rate approached 5 per cent this fall. The debate regarding its persistence rarely reflects the reality that inflation has both transitory and non-transitory components. Along with supply-chain disruption and an onslaught of pent-up demand fuelled by savings, there’s also the spending stimulus provided by government deficit financing. While some economists may quibble, it remains the case that providing so much additional spending power to individuals and business at a time when supply was disrupted – more money chasing fewer goods – can be a factor in rising prices.

Deficit to GDP vs. inflation with trend

2021, IMF35 Advanced Economies

8%

7

6

U.S.

5

Canada

4

3

2

1

0

-14%

-12

-10

-8

-6

-4

-2

0

2

Deficit to GDP (%)

the globe and mail

Source: IMF-WEO Database, October 2021

Deficit to GDP vs. inflation with trend

2021, IMF35 Advanced Economies

8%

7

6

U.S.

5

Canada

4

3

2

1

0

-14%

-12

-10

-8

-6

-4

-2

0

2

Deficit to GDP (%)

the globe and mail

Source: IMF-WEO Database, October 2021

Deficit to GDP vs. inflation with trend

2021, IMF35 Advanced Economies

8%

7

6

U.S.

5

Canada

4

3

2

1

0

-14%

-12

-10

-8

-6

-4

-2

0

2

Deficit to GDP (%)

the globe and mail, Source: IMF-WEO Database, October 2021

According to the IMF World Economic Outlook Database, in 2020 the deficit-to-GDP ratio for the 35 IMF Advanced economies averaged 7.2 per cent of GDP and ranged from a low of 0.6 per cent (Denmark) to a high of nearly 15 per cent (the U.S.). Canada had the fifth-highest deficit-to-GDP ratio, at about 11 per cent. Deficits are continuing in 2021, averaging 6.1 per cent of GDP, and ranging from 0.2 per cent for Singapore to nearly 12 per cent for the U.K., with Canada at just over 7 per cent.

As the figure here illustrates, there’s a positive relationship between higher deficit-to-GDP ratios and the rate of consumer inflation. On average, increasing the deficit-to-GDP ratio by eight percentage points is associated with approximately one point of inflation. Supply-chain disruptions and pent-up demand will eventually prove transitory, but continuing deficit financing and accompanying monetary accommodation will determine how much of the current inflation becomes non-transitory.

Livio Di Matteo, professor of economics, Lakehead University


Bonds, long-term bonds

Many fiscal watchers worry about future debt service costs as federal debt tops $1.2-trillion. If borrowing costs rise in 2022, the budget will suffer. Fortunately, the federal government has mitigated part of the pain by locking in today’s low borrowing costs for a generation by tripling the share of new issuances that are long-term bonds.

Kevin Milligan, professor of economics, Vancouver School of Economics at University of British Columbia (@kevinmilligan)


Living on borrowed time

Provincial governments across Canada face significant fiscal challenges. Independent reports from the Parliamentary Budget Office and the Finances of the Nation project show that, cumulatively, provincial finances are unsustainable. One reason for the fiscal challenges facing the province is that the COVID-19 pandemic and recession significantly increased their annual deficits. In fiscal 2020-21, the provinces ran a cumulative deficit of $59.8-billion. Those deficits would have been even larger were it not for substantial COVID-related emergency assistance.

It’s uncertain how quickly additional federal support will be withdrawn, but the federal government’s 2021 budget calls for it to be wound down quickly. If the provinces want to avoid rapid debt accumulation, they’ll need to find ways to reduce deficits in the years ahead while Ottawa winds down emergency transfers. The pace of this withdrawal is uncertain and will be important for budget watchers across Canada.

Steve Lafleur (@Steve_Lafleur) and Ben Eisen (@benkerteisen), analysts, Fraser Institute


Young West trounces aging East

Much was written in 2021 about Alberta’s referendum on equalization. Yet, Alberta isn’t the only part of the country that has a beef with Canada’s politics of redistribution. So does Atlantic Canada.

It’s well known that health care spending needs grow much faster in older, fast-aging provinces than younger, slow-aging ones. Yet over the past decade, federal health care funding has grown nearly three times slower in Atlantic Canada than in Alberta. Part of the gap has to do with differences in population growth. Another big reason, though, is Ottawa’s shift to allocating funds strictly on a per capita basis in 2014-15.

In 2021, Ottawa announced its child-care plan. Interestingly, funding under this program – the boldest social policy initiative to come out of Ottawa since Trudeau père – will not be distributed on a per capita basis, as is now the case for all other transfers outside of equalization payments. Rather, it will reflect the number of children in a province aged 12 and under.

As Canada’s youngest province, Alberta will be the big winner under this formula. Atlantic Canada, of course, will lose out most. In 2022, Jason Kenney will have little to fear. Fiscal federalism will continue to tilt his way, not Atlantic Canada’s.

Richard Saillant, Moncton-based economist and public policy consultant (@saillantrichard)


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