Economy 2021: the year of the big (inflationary) reset

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In the big reset of 2021, the $ 119 trillion global economy was brought back to near normalcy after one of the most severe blows it has received in generations.

Mankind has never tried this before, and has not needed it.

The COVID-19 pandemic, unlike the Spanish flu, the Great Depression and the two world wars, has reached all corners of the world, crushing economies in its path.

This makes 2021 a banner year, as the economic recovery is now well underway in Canada and most of the world’s major economies.

By September, employment in Canada had been restored to pre-pandemic levels, after a massive job loss in the event of a pandemic a year earlier.

In early December, Statistics Canada reported that employment had increased by an additional 153,700 jobs in November, about four times the forecast.

That brought total employment to 186,000 more jobs than in February 2020, the month before COVID-19 put the Canadian economy into free fall.

With about 76 percent of eligible Canadians fully vaccinated by early November, many of last year’s restrictions on economic activity were lifted in 2021.

As a result, economic growth in Canada will be about double its normal rate this year and next.

A labor shortage that has hampered the recovery in 2021 will ease as Canada welcomes an estimated 800,000 new Canadians in total this year and next.

The inflation rate for October, Statistics Canada’s latest reporting period as of this writing, was alarming at 4.7%, an 18-year high.

In November, US inflation was even higher; at 6.8 percent, it was near a 40-year high. The main reason for the difference is the more severe labor shortage in the United States, largely due to unusually low levels of American immigration in recent years.

But the consensus forecast for inflation in Canada is 2.6% next year and around 2.0% in each of the next three years. T

This may seem like a bullish outlook given, for example, pump prices in the GTA currently around 44% above the same time last year price. But today’s higher prices are a short-term test, as we will see.

Abnormally high short-term inflation is the price we have had to pay in 2021 for economic recovery.

Price inflation has been in a vicious cycle in 2021.

Suppressed demand for goods after an 18-month hiatus in consumer spending has overtaxed supply chains, reducing supply and pushing up prices.

Decades of offshoring and globalization have made the North American economy vulnerable to extensive and fragile supply lines.

Periodic plant closures in China this year due to COVID-19 outbreaks have blocked the supply of North American products that were once made locally. Chinese and US ports are struggling to handle up to three times the cargo they were designed to handle.

And America suffers from a severe shortage of long-haul truckers bringing goods to Canada from California and other congested US ports.

All of this brought a new appreciation for local buying. This year has seen a new “in-shoring” movement to repatriate offshore production to North America.

But this movement is still in its infancy. In the meantime, the higher transportation costs are passed on to Canadian consumers.

So are higher steel prices to satisfy accelerated investments in wind farms and solar power installations. And lumber consumed in this year’s home improvement boom. And cobalt, lithium and other strategic materials in the race to build stronger electric vehicles and batteries.

Prices have gone up throughout the economy as we try to decarbonize it while rebuilding it.

A glaring example of this year’s supply issues is semiconductors, the brain of our information economy. The chip shortage has driven up the price of smartphones, laptops and automobiles, whether new or used.

During the first phase of last year’s pandemic, we learned that most of the world’s most common medical supplies – gowns, masks and antibacterial lotions, for example – came from China.

This year, as Canada quickly achieved self-sufficiency in some of these medical supplies, the world realized that approximately 80% of the best performing semiconductors on the planet are made by one company, Taiwan. Semiconductor Manufacturing Co. Ltd. (TSMC).

The United States, Europe and Canada, now aware of this vulnerability, have allocated some of their unprecedented stimulus spending this year to achieving a semblance of self-sufficiency in semiconductors and other commodities. strategic importance.

And, in the short term, government stimulus spending has been another major cause of inflation.

By injecting more than $ 300 billion in pandemic income support into Canadian households and businesses, Ottawa has kept the economy poised for as strong and rapid an economic recovery as possible.

Every national government and central bank that quickly pumped unprecedented amounts of pandemic relief money into their economies knew they risked unleashing a surge of above-average inflation.

By protecting household wealth and the viability of businesses, fiscal stimulus in Canada and abroad have fueled today’s pent-up consumer spending, in which too many dollars go to too few goods.

During the generalized inflation of 2021, the prices of some goods and services actually fell this year, notably vegetables and some professional services.

And current above-average inflation rates seem unlikely to exceed the 5.6% peak of 1991, or the double-digit inflation of the 1970s and early 1980s.

The pandemic stimulus worked. It represents one of the largest and fastest-growing economic recoveries in history, starting from a 2020 pandemic economic collapse unprecedented in the speed and depth of the plunge.

Now all of these factors that cause inflation must be eliminated. “The market is going to have to adjust to a 100-year shock from the pandemic,” Kevin Page, former Parliamentary Budget Officer, told CBC News in November.

In 2021, this great denouement began. Ottawa has cut most of its pandemic relief spending. And the Bank of Canada (BOC) is ending its funding in the pandemic era of this stimulus with its purchases of government debt.

The BOC, like its global counterparts, is now set to proceed with a series of interest rate hikes next year. The resulting rise in borrowing costs should help curb inflation.

Meanwhile, the world price of oil, at $ 79.15 (US) per barrel at the time of this writing, is far from the 2008 high of around $ 133.88 (US).

The current pump price in the GTA is “only” 22% higher than the price before the November 2019 pandemic. And it will decline in the coming months, as oil producers and refiners gradually return. at full capacity after widespread shutdowns last year.

There will also be downward pressure on inflation in labor costs, with a recovery already underway from unusually low immigration levels made necessary by travel restrictions linked to the pandemic.

Around the same time next year, as global demand declines from above-average rates for 2021, international ports will be less stressed.

Where we won’t see price relief anytime soon, it seems, is in housing costs in the GTA.

To be clear, the Canadian economy has reacted this year to the housing shortage. In the 12 months to September, builders increased housing starts in Canada to 260,500, the highest number in 44 years, and 26% above the average for the previous four years.

The housing crisis, which is expected to survive the pandemic, is a shortage of affordable lodging. And this shortage is driving people out of Toronto and other major cities in North America.

So soon after city planner Richard Florida announced a new “creative class” of inner-city dwellers a few years ago, 2021 has revealed a specter of hollowed-out cities on the horizon.

In StatsCan’s latest report on urban population growth, the Toronto census metropolitan area (CMA) suffered a net loss of over 50,000 residents in the 12 months ending July 1, 2020. The recent status from the United States shows a similar exodus from the overpriced real estate markets in Los Angeles. , San Francisco and neighboring Silicon Valley, and other major population centers.

In its October report on house prices in Canada, Moody’s Analytics said the Toronto housing market was almost 40% overvalued, based on the latest prices from the previous quarter.

Yet in November, the average price of a home sold in the GTA rose again, reaching a new record high of $ 1.2 million, up 22% from the same month a year earlier.

And in December, Re / Max Canada forecasted average home selling prices in Toronto to rise another 10% in 2022.

“Big city [housing] Supply problems are likely to persist, “said RBC Economics analyst Robert Hogue,” especially as higher immigration drives up demand for housing in the years to come. ”

Leave it to the experts to try and explain how Toronto could meet the challenge of an unprecedented pandemic while leaving its decades-old affordable housing crisis unresolved.

Happy Holidays. Be well and stay safe.


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