Financial signs show we could return to normality after COVID-19
We often hear that we live in uncertain times. But in truth, we are returning to normalcy, and sooner than expected after the first pandemic in modern times.
With normality come reasons for optimism. Here are a few.
Inflation seems to have peaked. On Tuesday, Statistics Canada announced that annualized inflation in July was 7.6%, down from 8.1% in May. Inflation is expected to fall to around 3% next year, not far from the 2% norm of the past three decades.
Recession worries are overblown. After a weak start to 2022, Canadian GDP growth is expected to strengthen in the second half of the year and outpace its G7 counterparts in 2022.
With inflation on the decline, the Bank of Canada (BoC) and the other central banks will be able to ease their interest rate hikes as of this year.
The central banks’ campaign to destroy inflation has seen Canadian borrowing costs increase 10-fold this year. But it has managed to break the upward trajectory of everything from global oil prices to GTA property prices, each down more than 20% in the past few months.
Consumers are also doing their part, with an undeclared “buyers strike”.
Economists are again noticing the surprising resilience of consumer spending, which is supporting Canada’s continued GDP growth. But consumers have also wisely begun to balk at grossly inflated prices for limited-quantity products.
This will change next year, as labor shortages and supply chain disruptions (already abated) that have contributed to historically high inflation see a significant improvement.
Pent-up demand dating from the pandemic and outsized Canadian household savings (about $300 billion) should fuel a continued economic recovery.
Of course, some of the factors that affect us are geopolitical and take place far from home.
Among these, however, is the US Congress’ passage last Friday of a bill that will spend $369 billion (US) on climate and energy investments.
The bill, signed into law this week by US President Joe Biden, is an economic boon for Canada.
The landmark U.S. legislation will spur future electric vehicle (EV) production from Canada’s automotive sector and a Canadian mining sector with its hoard of critical metals used in the manufacture of EV batteries.
The proposed US climate and energy bill will also spur Canadian development of clean technologies across all industries.
In contrast, Russia’s invasion of Ukraine is an example of external upheaval that can upset Western plans for economic recovery.
War is estimated to account for about 0.5% of Canada’s inflation rate.
That said, the war in Ukraine has accelerated Europe’s already advanced efforts to decarbonize its energy mix. It is a source of inspiration for other regions, including Canada, to reduce their dependence on fossil fuels.
The playbook the West has developed this year to insulate the Russian economy is working. This has helped thwart Vladimir Putin’s war aims and has already plunged Russia into a deep recession. The World Bank predicts an 11.2 drop per plunge in Russian GDP this year.
This playbook, with its comprehensive sanctions against a major economy by an alliance of Western countries, is a first in modern history. And it can be applied elsewhere.
Its next most obvious use is Taiwan, threatened by an increasingly hegemonic China.
China could one day assert its 73-year-old claim to Taiwan with a military invasion, a wild card for investors in emerging markets.
In this case, the Western alliance could seek to isolate China as it has Russia.
That wouldn’t be particularly difficult to achieve.
Almost everything the West buys from China can be obtained elsewhere. Alternative suppliers include Mexico, South Korea, Japan, Bangladesh, Australasia, Vietnam and South America.
And after decades of offshoring, especially to China, Western economies would increase local production in a bid for self-sufficiency.
This transition, usually referred to as “offshoring,” is already underway among North American companies. It started in Canada in the first year of the pandemic, when we found ourselves overly dependent on imported medical supplies.
The United States began this year to rebuild its critical semiconductor sector, which has become overly dependent on foreign suppliers.
The massive unemployment in Chinese factories that would result from the closure of Western markets could threaten the Chinese Communist Party’s grip on power.
Closer to home, this year’s decline in real estate and stock market values is finally bringing asset prices back to reasonable levels.
From these lower valuations, assets will be able to realize real value-based gains now that speculative excess has been largely drained from the markets.
And you are in luck.
The Canada Revenue Agency (CRA) is trying to clear approximately $1.4 billion in uncashed checks owed to taxpayers, totaling almost nine million cheques.
So don’t ignore the CRA’s 75,000 emails to Canadians about these deals, starting this month.
You could receive $1,600 or $46. But it’s real money for once, not another online scammer.