For this week’s update, we are going to focus on an updated outlook from RBC Economics. Here is the link to the full article RBC Economics Macroeconomic Report Q1 202

Russian Invasion and Surging Inflation Take Over as Key Global Growth Risks

With the easing of restrictions in many regions, the economic impact of Covid was beginning to ebb. However, the Russian invasion of Ukraine has brought forth a new set of risks. These risks have primarily manifested in the form of much higher commodity prices and further damage to global supply chains.

RBC Economics points out that Canada has little direct exposure to Russia:

However, as noted, rising food and energy prices are already having a significant indirect impact:

While Russia’s invasion of Ukraine would have had a major impact in isolation, it occurred at a time when Canada and the world were already grappling with significant challenges, especially as it related to the cost of shipping and the availability of labor. Quite simply, many industries are suffering from a lack of available workers and this has been especially acute in services-based industries that have seen an exodus of workers:

While RBC Economics expects immigration to help ease some of Canada’s labor shortages, the shortages are expected to persist for some time to come. RBC Economics notes that Canada has struggled with labor shortages for several years as the baby boomers continue to retire in droves and after a brief “Covid pause”, this trend is expected to continue:

This labor shortage, as well as other factors, are putting upward pressure on wages, which feeds directly into the inflation challenges we currently face.

The good news is that Canada enters this phase of the crisis with significant pent up savings:

Now, this savings is not necessarily evenly distributed with the high-end enjoying a disproportionate share, but RBC Economics expects this savings to act as a buffer against rising prices and also contribute to demand, especially in the services side of the economy, which took the biggest hit during Covid.

Against this backdrop, the Bank of Canada raised interest rates last week for the first time since the onset of the pandemic with the U.S. Federal Reserve expected to follow suit next week. While RBC Economics expects the BoC and the Fed to keep a close eye on the impacts of the war in Ukraine, it also expects rate hikes to continue into 2023 as both Central Banks look to normalize policy.

In the case of the BoC, RBC Economics expects 25 basis point rate hikes every quarter through the middle of 2023, which would bring the overnight rate back to 1.75%, which is where it was prior to the Covid shutdown.

While higher rates will put some pressure on consumers, RBC Economics believes that consumers are well positioned to absorb higher rates. Most consumer debt is in the form of fixed rate mortgages, which will not feel the impact of rising rates for some time to come, while RBC Economics does not expect the terminal rate (where rates finally settle after the rate hiking cycle has ended) to be much different than it was pre-pandemic.

That said – debt levels in Canada are high and thus are an area of vulnerability. RBC Economics expects rising rates and waning affordability to weigh on housing. However, because of strong immigration and a lack of supply, RBC Economics sees price gains slowing rather than actual price declines.

Overall, while their outlook has several points of vulnerability for Canada, RBC Economics still sees growth of 4.3% for 2022, slowing to 2.6% in 2023. The 2022 figure remains well above the norms of the past 15-years, while even 2023 is ~0.5% above the average since 2010.