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What are the economic risks if supply chain disruptions and accelerating inflation last longer than anticipated, coupled with a prolonged economic slowdown in China? Anthony Okolie speaks with Andrew Hencic, Senior Economist, TD Economics, about the key risks to the 2022 growth outlook.
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- Andrew, you just recently did a report that highlights some of the possible headwinds for both Canadian and US economic growth this year. Now, before we get into that, I want to ask you-- where do we stand right now with the supply chain issues?
- Well, the supply chains have started to show a little bit of resilience and recovery. That's not to say things are a lot better, but take, for instance, international shipping costs. Prices have come down a little bit since their peaks in the fall. They're still very elevated, but things aren't getting worse.
We also saw in December's ISM manufacturing numbers that supplier delivery times slowed their rate of erosion and inventories have slowly started to creep up. These are kind of the early signals that we would have expected once supply chains kind of start to show a little bit of health. Going forward, we would anticipate that as consumers rotate their spending back to services and away from goods, this is going to add a little bit of breathing room for suppliers. And that's really when the recovery is going to take hold.
- OK. So you point to some of those early signals. I want to talk about inflation. Do you believe that it's peaked, or do you expect inflation to continue to accelerate?
- Well, we expect that the fourth quarter of 2021 and early-2022 to really be the peak in inflation rates. These kind of rapid price increases are going to start to moderate toward the end of the year and into 2023. Part of the story was because we had rising energy prices coming off of a very low 2020 and then, of course, with the supply chain issues.
Now, we're already starting to see that monetary authorities are going to start countering the inflationary impulse by raising rates. So the end of 2021 and early-2022 will likely prove to be the peak of inflation.
- OK. So let's turn to your study. And specifically, I want you to outline for us some of the key assumptions that you make in your modeling before we kind of get to some of the outcomes.
- Well, the purpose of the study was to look at some of the other risks beyond COVID. Obviously, the pandemic is top of mind. So what we wanted to examine is what role will a global inflationary impulse, like the one we've been experiencing, if it lasts a little bit longer, what role will this have on economic growth? And the other thing we wanted to examine, was what happens if the Chinese real estate rebalancing takes a little bit longer or maybe becomes a little more severe than we anticipated? So we ran a global simulation with these two shocks to see what would happen to economic growth.
- And what does the study conclude about Canadian and US economic growth based on these assumptions?
- Well, at the time that we conducted it, we were working off our September baseline. And relative to that, our conclusion was that 0.6 percentage points off of real GDP growth could be lost in Canada and roughly 0.7% in the US. Now, obviously, the COVID situation has turned a little more severe since the early fall.
And so the impact might be a little bit smaller, given that our baseline has come in a little bit. But this is a non-negligible amount of growth that would be foregone if these two dual shocks were to really come to fruition.
- OK, so given what we know today, what should investors take away from this study?
- Well, again, the purpose of the study was to highlight some additional risks beyond COVID. And what investors really need to remember is that we're in a period of high uncertainty. And things can change very quickly. Now, when it comes to the virus, we're seeing that every additional wave is having a smaller and smaller economic impact.
Knowing that, it's important to look for where the other risks lie. And what the study sought to do was to identify two of those big risks and how they may influence the outlook beyond the pandemic.
- Andrew, thank you very much for joining us.
- Thank you very much for having me, Anthony.
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- Well, the supply chains have started to show a little bit of resilience and recovery. That's not to say things are a lot better, but take, for instance, international shipping costs. Prices have come down a little bit since their peaks in the fall. They're still very elevated, but things aren't getting worse.
We also saw in December's ISM manufacturing numbers that supplier delivery times slowed their rate of erosion and inventories have slowly started to creep up. These are kind of the early signals that we would have expected once supply chains kind of start to show a little bit of health. Going forward, we would anticipate that as consumers rotate their spending back to services and away from goods, this is going to add a little bit of breathing room for suppliers. And that's really when the recovery is going to take hold.
- OK. So you point to some of those early signals. I want to talk about inflation. Do you believe that it's peaked, or do you expect inflation to continue to accelerate?
- Well, we expect that the fourth quarter of 2021 and early-2022 to really be the peak in inflation rates. These kind of rapid price increases are going to start to moderate toward the end of the year and into 2023. Part of the story was because we had rising energy prices coming off of a very low 2020 and then, of course, with the supply chain issues.
Now, we're already starting to see that monetary authorities are going to start countering the inflationary impulse by raising rates. So the end of 2021 and early-2022 will likely prove to be the peak of inflation.
- OK. So let's turn to your study. And specifically, I want you to outline for us some of the key assumptions that you make in your modeling before we kind of get to some of the outcomes.
- Well, the purpose of the study was to look at some of the other risks beyond COVID. Obviously, the pandemic is top of mind. So what we wanted to examine is what role will a global inflationary impulse, like the one we've been experiencing, if it lasts a little bit longer, what role will this have on economic growth? And the other thing we wanted to examine, was what happens if the Chinese real estate rebalancing takes a little bit longer or maybe becomes a little more severe than we anticipated? So we ran a global simulation with these two shocks to see what would happen to economic growth.
- And what does the study conclude about Canadian and US economic growth based on these assumptions?
- Well, at the time that we conducted it, we were working off our September baseline. And relative to that, our conclusion was that 0.6 percentage points off of real GDP growth could be lost in Canada and roughly 0.7% in the US. Now, obviously, the COVID situation has turned a little more severe since the early fall.
And so the impact might be a little bit smaller, given that our baseline has come in a little bit. But this is a non-negligible amount of growth that would be foregone if these two dual shocks were to really come to fruition.
- OK, so given what we know today, what should investors take away from this study?
- Well, again, the purpose of the study was to highlight some additional risks beyond COVID. And what investors really need to remember is that we're in a period of high uncertainty. And things can change very quickly. Now, when it comes to the virus, we're seeing that every additional wave is having a smaller and smaller economic impact.
Knowing that, it's important to look for where the other risks lie. And what the study sought to do was to identify two of those big risks and how they may influence the outlook beyond the pandemic.
- Andrew, thank you very much for joining us.
- Thank you very much for having me, Anthony.
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