Blog

Summary

BY MATTHIEU ARSENEAU AND JOCELYN PAQUET

The pandemic picture has brightened greatly in recent weeks. Despite this relief, economic recovery has been slow to materialize. The reason is that many countries are now dealing with sharp rises in energy costs. Though a number of governments have announced measures to cushion the impact on households of gas price increases, their assistance is unlikely to offset all of the decline in purchasing power of consumers. Businesses will also be affected. Their production costs, already boosted by the rise of prices for raw materials and transportation, are at risk of rising further, eroding profit margins. To add to the woes of the global economy, China’s real estate sector seems to be in trouble following the inability of Evergrande and Fantasia, two of the world’s largest real estate promoters, to meet some of their debt obligations. In view of the worldwide heightening of economic risks, we have reduced our forecast of 2021 global GDP growth from 5.6% to 5.5%. The revision is due to deterioration in the positions of emerging markets, Europe, and the United States. Also, we do not exclude the possibility that these prospective pitfalls could have repercussions extending into early 2022, whence our revision of next year’s global growth from 4.5% to 4.0%.

Although the disappointing September non-farm payroll report was partly offset by an upward revision of data from previous months, U.S. employment is undeniably sluggish. And despite the sums released by Washington to limit the repercussions of the layoffs linked to COVID-19, some households - especially those at the bottom of the income scale - are at risk now that income support programs are a thing of the past. So a recovery of the labour market is required for the economic recovery to continue. The more so under conditions where labour scarcity has reduced production capacity. Running out of options to attract potential candidates, American businesses have had to resolve to raise compensations; average hourly earnings rose at an annual rate of 6.0% over the last six months. Pay raises are good news for workers but could push prices up, and for a longer period than the Federal Reserve expected. Inflation seems already more widespread than the central bank is suggesting. The persistence of inflation suggests a coming normalization phase of U.S. monetary policy. That could act to brake sectors more sensitive to interest-rate rises (housing and investment, for example). Upward pressure on prices could also erode the purchasing power of U.S. consumers. Given this outlook, we have revised down our scenario for U.S. growth in 2022, to 3.4% from 4.1%.

Our forecast for real growth in 2021 is unchanged this month at 5.0%, but our forecast for 2022 is revised down to 3.8% from 4.0%. Soaring commodity prices will continue to benefit Canada's economy, but supply chain disruptions and resulting inflation are a risk under current conditions. Nonetheless, consumers are equipped to support the on-going recovery. In barely 19 months, employment has returned to its pre-pandemic count. This is not only the quickest recovery of the last four recessions but also spectacular compared to the U.S., whose employment count is still more than 3% short of its pre-recession peak. Such a turnaround and the resulting rise in incomes suggests that households are ready to stand on their own two feet, without extraordinary government support. The amount of excess savings already accumulated by households is substantial (11.4% of GDP) and represents a cushion to mitigate the impact of price increases on living standards.