Economic forecasting is a complex business at the best of times, but trying to read the portents of a global economy in recovery from a pandemic has made it even more complicated.
“This is one of the more complex economic environments certainly encountered in my career as an economist,” Douglas Porter, chief economist for BMO Financial Group, said Feb. 1 during a session on financial and commodity markets at the Association of Mineral (AME) Roundup conference in Vancouver.
Generally, the signs are good, though the signals may be complicated somewhat by things economists have not had to factor in for decades, like high inflation and high employment.
One of the biggest stories of 2022 for the economy is going to be employment – high employment, that is, Porter said
“We have a very serious imbalance on the labour market front,” he said. “Right now in the U.S. we’ve got almost 11 million open jobs, whereas the amount of people counted as officially unemployed are less than 7 million.
“So we’ve got way more open jobs than we do have people unemployed. Historically, that kind of imbalance points due north for wages, and we are starting to see wage pressures mount in the U.S.”
In Canada, there are about 1 million job vacancies, though slightly more than 1 million people unemployed.
“We are starting to see wage pressures begin to build in Canada as well,” Porter said.
“We think that, by later this year, we could be looking at the lowest jobless rate that we’ve seen in more than 50 years in both Canada and the U.S.,” Porter said.
Though a global pandemic hasn’t been officially declared over yet, financial markets are operating as though it has., he added.
“Even with the ripple that we’ve seen in equity markets since the start of the year, largely speaking financial markets are still pointing towards relatively robust growth as we go through this year,” Porter said.
Commodities have been on fire since mid-2021, with everything from oil to lumber soaring. High oil prices in particular are helping drive up the consumer price index, and home prices that spiked roughly 20 per cent in the past year in Canada and the U.S. will also feed the inflationary fires.
“This is not just a North American story,” Porter said. “We are seeing strong gains in consumer prices almost across the emerging market and most of the advanced world. Even Japan, which has been looking at deflation, arguably, for about 30 years, is actually seeing inflation of almost 1 per cent, which is relatively high for Japan.”
U.S. inflation rates are among the highest, at 7 per cent.
Benchmark oil prices are well above US$85 per barrel. Porter said he thinks crude oil prices will settle around the US$75 to US$80 per barrel range. Even so, BMO expects inflation to linger longer than some economists initially predicted.
“Even with more moderate oil prices, with an improved supply chain situation, we are still looking at inflation in the range of 2.5 per cent to 3 per cent in Canada and the U.S. by late 2023, well above the sub 2 per cent trend that we were seeing before the pandemic began.
Housing prices will likely continue to add to inflationary pressure, Porter said.
“Even if some of the reopening pressures do fade over the next year, even if oil pressures do stabilize, and even if the supply issues do improve, there is still some sting in the tail from wages and housing that could lead to firmer inflation lasting for some time.”
