Economic Power Hour: Outlook & Insights For 2022
BMO recently held a virtual event to explore the economic trends, opportunities and challenges that are set to impact your business. Our speakers provided perspective on the state of the economic recovery and the key drivers that will shape the economic landscape as we look ahead to 2022.
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Douglas: Thank you very much, and hello everyone. It is an incredibly complex economic environment we're dealing with these days. I'm going to delve into that more in the next 10 to 15 minutes or so from a broad macro standpoint, then I'm going to hand it out to my colleague, Robert Kavcic to delve deeper into the provincial matters or the more regional matters. Definitely one complexity that we are all dealing with in a surprise development, frankly, this year has been the many supply chain issues that we've been dealing with.
I'll just start off with this cartoon strip which I think, in many respects, really does encapsulate the issues that the entire global economy is dealing with at this point. I love Santa's punchline that we're out of coal too. Who knew in a world where we were trying to move away from coal production, that we'd even have a shortage of coal, but that just happens to be the case in China. That's going to continue to be an issue in 2022. Of course, the other issue that we'll continue to grapple with is the pandemic. As much as we all wish that it was behind us, it is not completely gone away as an economic issue.
There is some good news on that front. Certainly in North America, broadly, we have seen the fourth wave recede in recent weeks. Now, that's not true everywhere. Here in Ontario, we've actually seen it back up, the number of new cases backing up in recent days and weeks. I am keeping a close eye on Europe where we have seen the number of new cases rise and rise pretty notably in the last month or so, largely due to the so-called Delta Plus variant. The good news though, is the vaccines do continue to roll out in a very aggressive fashion right around the Western world. Canada is certainly towards the upper end of the spectrum in terms of vaccination rates, but we don't stand out particularly.
In most Western economies, we're looking at a vaccination rate for adults of well above 80%. The US is a larger. There's no doubt about it. The US has a trail behind most other major economies, but even there, the numbers have been relatively strong. Now, looking ahead, what we believe is that we could see a fifth wave, we could see a sixth wave, but ultimately we don't believe that the virus is going to be the dominant economic story in 2022, as it has been for the last couple of years. It will tend to throw some sand in the gears and keep it from being a full recovery next year, but as I said, we just don't see it as being the overwhelming economic story that it has been so far.
Now, adding these two factors up, the supply chain issues or bottlenecks and Delta and whatever other waves we're going to have to deal with, these two factors have tended the dent global growth a little bit in the past year. They'll dent global growth a little bit in 2022, but from a very big picture view, we still had almost 6% global growth this year. We're likely to have almost 5% global growth next year. Those are two very strong years and a nice recovery from the incredibly challenging position we were in last year when the economy fell by almost 3%.
Just to put all these numbers into some perspective at the bottom on the right-hand side, a typical year for the global economy would be about 3% growth. We've been nowhere close to typical for the global economy, even out into 2023, we still see above average because there are some areas of the world that will be very slow to vaccinate. There will be some sectors that will really probably only fully recover only in 2023. We don't see a fully normal year for the global economy until we get out into 2024 or so.
Turning to North America, it's been a roughly similar picture, in that, we saw a very solid rebound in both Canada in the US, but again, the growth rates didn't quite live up to the most optimistic expectations that we and others had for Canada and the US back in the spring. For instance, at one point this year, we thought the US economy could grow by 7% this year. It now looks like it'll grow by close to 5.5%. That's still a very strong year for the US economy, one of the strongest years we've seen in decades and a complete retracement of the decline in output that we saw in 2020. It did fall short a bit of what we were hoping for back in the spring and summer because of the supply chain issues and because of the spread of the Delta variant. We do see another above-average growth year in 2022, but definitely a calmer year for the US economy next year, getting close to what we would consider to be normal.
A roughly similar story for Canada, a little bit nuanced though. Canada saw a deeper decline in 2020 simply because our restrictions or lockdowns lasted longer. They were deeper, they were more intense, and so the Canadian economy was hit harder in 2020. It's been a little bit slower to recover than the US economy. Unlike the US, Canada is actually still operating a little bit below where it was before the pandemic began, so we've got some catching up to do, and we do think that Canada will actually post faster growth than the US next year.
In fact, we see very little slow down in Canada in 2022. We're still looking at something close to 5% growth even next year as we more fully reopen in a lot of the sectors that up until very recently were still pretty much shut down. Much of the full recovery will actually be a 2022 story. Even when we look out into 2023, we still see somewhat above-average growth even in that whole year.
Now, of course, the one issue that this quick rebound that we've been dealing with and the supply chain issues that the global economy has been dealing with, one of the outcomes of that is we've been faced with a big runup in inflation. We just learned this morning-- This chart is very old, very dated. We put it together late last night. We just learned this morning that US inflation picked up to its highest level in decades in the month of October. It was posted at 6.2% year-over-year pace. If anything, we could actually see that rate go just a little bit higher in the next couple of months before it crests, and then starts to recede in 2022.
Now there are wide variety of reasons why inflation has come back with such a vengeance so far this year. Some of it is just prices are being compared to the extreme lows that they saw during the depths of the pandemic last year. We've seen rebounds in things like hotel charges and airfares and, of course, energy per prices have really led the way on the comeback. Then, yes, the supply chain issues have also fed into inflation. Auto prices right across the board have been very strong. Used car prices have been one of the biggest drivers of US inflation.
Now, Canadian inflation has been a bit more restrained, but even here, we've been looking at the highest inflation rates that we've seen in almost 20 years. We do think that that inflation rate is likely go a little bit higher yet in the months ahead. We could be looking at one point and to 5% inflation rate in Canada before it fades in 2022. Now, if we look at the average for the year, and I think on this front, the most important number I'd leave you with, is we're expecting inflation to average for the full year, for both this year and next between 3.25% and 3.5%.
Now that doesn't sound that scary, when we've got a 6% inflation rate in the US right now, and that headline inflation rate in Canada right now is a little bit more than 4%, but just one little factoid is we haven't seen a 3% inflation rate for a full year in Canada since 1991, the year the GST came into effect. These inflation numbers are definitely very meaty compared to what we've seen in the recent past.
Now this table just looks at, if you look at the right-hand side, these are the prices that have risen the most in the last 12 months. In many respects, it's all the usual suspects at the top of the list. It's energy prices. Gasoline and natural gas have really led the way. I mentioned airfares and hotel rates have bounced back from the depths of the despair last year. Most of these are likely to prove to be relatively temporary bulges in inflation, but as we move down that column on the right, I get increasingly concerned that these are not so-called transitory, and they might be a little bit stickier. Things like new home prices, Robert's going to talk more about the housing market, but we've definitely seen sustained strength in home prices.
Meet just one aspect of a broader story, of how we're seeing real pressure on food prices right now, and then I mentioned autos as well have been persistently strong. In a normal year, auto prices barely move in quality-adjusted terms. Furniture and appliances, of course, that's just the wave of demand that we've seen globally that's really pressuring supply chains everywhere. On the left-hand side, I've noted a lot of things that have actually declined in price over the last 12 months. The point there that I'd want to make is not everything is going up with a bullet in terms in prices. There are actually some things that have actually fallen in price last year, and a few of those are pretty important. Things like telephone services, auto insurance, clothing prices have actually all come down in the last year. Again, the point is not everything is roaring ahead in terms of price gains at this point. Now, what does this environment all mean for the interest rate outlook, and certainly we've heard a lot as even from our own Bank of Canada Governor, Mr. Macklem, in recent weeks? I think that really the key message that the Bank of Canada delivered in late October is that, the risks of an earlier interest rate increase have definitely risen markedly because of this high side, surprise, and inflation. The Bank of Canada Governor left quite a wide ban in terms of when interest rates might start to rise. He said it could happen anywhere between April and September, and at this point, our official view is that it's going to be right in the middle of that segment.
We see the first rate hike in the middle of 2022, and then we see the Bank of Canada raising their short-term interest rate by a quarter percent per calendar quarter until they get rates back to where they were before the pandemic began. That would be about 1.5 percentage points above where we stand right now, and we think that would be reached by late 2023. Now the risks of that forecast are that they would start going even earlier, perhaps as early as the spring. They might go a little bit faster than once per quarter and, ultimately, rates could end higher than where they began before the pandemic began, I should say.
In other words, the risks are faster, stronger, and higher for interest rates. Usually, when I pull out this chart when I'm giving this presentation, I say, "If we're going to be rowing under an interest rate of forecast, it's that rates will be a little bit lower than what we're forecasting. That's not the case this time. I think the risks are definitely to the high side of the forecast. For the FED, we think they'll start a little bit behind the Bank of Canada. The federal reserve is only just now beginning to trim their bond purchases or quantitative easing.
They won't raise interest rates until they're done with QE and we think that that's likely to be the case around the middle part of 2022. We see the first rate hike from the federal reserve in September of next year, and then we expect the fed to move by 0.25% per calendar quarter. Now for longer-term interest rates, it's never quite as smooth as this but we do see 10-year yields ending next year by at around 2% or so. That's the case in both Canada and the US.
The final topic I'll touch on just before I hand it over to Robert, is, what does this all mean for the Canadian dollar? Well, much like many other financial variables, the Canadian dollar was absolutely pounded in the depths of the pandemic. In early 2020, it actually got below 70 cents. Of course, we're a little bit above 80 cents today. Our core view is that the Canadian dollar is more likely to strengthen rather than weaken over the next 12 months.
There are a number of reasons why we're relatively optimistic on the Canadian dollar over the short to medium term. First and foremost, just based on commodity prices, there's a lot more headroom for the Canadian dollar to go. On oil prices alone, the Canadian dollar is actually somewhat undervalued at this point. We don't think the Canadian dollar is going to necessarily get up to full valuation over the next year, but if energy prices stay anywhere close to current levels, there's certainly a lot more upside potential for the currency.
As well as I mentioned, we do see the banking raising interest rates before the fed, and finally, in a world where the global economy is undergoing a relatively robust recovery, we are generally optimistic on the Canadian dollar. Now looking further out, if I were to extend this chart out three to five years, we'd be less optimistic on the Canadian dollar. Our view of fair value for the Canadian dollar is somewhat more restrained than we are today. We believe at 75 to 80 cents is closer to the mark for the longer-term level of fair value, but as I said, the key point is the short-term outlook is for the Canadian dollar to continue to build on the strength of the past year. That's it for the broader outlook. I'd now like to welcome my colleague, Robert [unintelligible 00:12:40] again to delve more into the regional outlook. Thank you very much.
[00:12:47] [END OF AUDIO]
Douglas Porter
Chief Economist and Managing Director, BMO Financial Group
BMO recently held a virtual event to explore the economic trends, opportunities and challenges that are set to impact your business. Our speakers provided perspective on the state of the economic recovery and the key drivers that will shape the economic landscape as we look ahead to 2022.
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