Two weeks ago, I attended the National Mortgage Brokers Conference and had the pleasure of seeing one of the most trusted economists in the country speak: Benjamin Tal. Ben is the Deputy Chief Economist at CIBC. I’ve been following him for over 20 years, as have many Canadians, and for good reason; not only is he exceptionally skilled at simplifying complex concepts; he’s also exceptionally skilled at getting it right.
His forecasts have always proven uncannily accurate, which is why he’s always been my go-to resource for what the Canadian economy can expect next. As always, his insights at the conference were extremely poignant. He painted a crystal clear picture of how we got here, what’s currently happening, and what’s to come.
Now, I’d like to share that picture with you.
The Inflation Crisis
It’s no secret to anyone that’s bought anything recently: inflation has gotten out of hand. The Bank of Canada has swiftly responded with aggressive rate hikes aimed at cooling the economy and bringing inflation down. Rightfully, many Canadians (especially homeowners) are left scratching their heads. Why did this happen?
It all begins with looking at the four items we base inflation expectations on: bread, milk, beer, and gasoline. When you look at the numbers, it’s instantly clear that a disproportionate percentage of inflation expectation is coming from gasoline. It makes you wonder what would happen if Canada just simply opened up our oil and gas production.
COVID-19 and the Economy
A picture of our economy wouldn’t be complete without factoring in the pandemic. For the last 3 years, the supply chain has been severely disrupted by COVID outbreaks. These constant and cascading disruptions are said to account for over 50% of our current inflation situation. To compound the supply chain issue, cash-rich Canadians crammed 4 years of spending into 1 year. Demand for almost every good imaginable put a strain on the supply chain and the broader economy which we are still paying for today.
The Global Economy
Canada is not an island. For better and for worse, we are part of a global economy – so any serious conversation about the Canadian economy should always include what’s happening overseas. The Russia/Ukraine war is having a devastating effect on the European economy, particularly Germany.
Germany is currently in a recession that’s partially fuelled by an energy shortage. Putin has turned off the tap on oil and gas that Germany relies on putting them in full conservation mode. In fact, I just checked the average cost of electricity there: Ontarians pay just over $0.20CAD per kw/h. Germans now pay $0.43USD. That is a staggering difference. The German energy crisis may feel far away, but its effects are being felt across the world, including right here in Canada.
The Labour Shortage
There wouldn’t be historic inflation if it wasn’t for the unique labour market we’re currently experiencing. It’s arguably the #1 factor. To learn more about Benjamin Tal’s take on employment, stay tuned for part two of this blog post.
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Steve Garganis: 416-224-0114; email@example.com