A look back at 2022: a year of economic gloom and growth

Looking back at the big economic stories of 2022, they’re all negative.

However, while elevated inflation has been making life more difficult for households and businesses, the overall economy in Alberta and Canada will still post strong numbers this year.

Unemployment has been low and GDP is forecast to expand by about 3.5% nationally and by 5.0% in Alberta.

The economic pain associated with the negative economic stories of 2022 will, however, be felt more acutely next year as the full impact of higher interest rates works its way through the economy.

On a less gloomy note, if the interest rate increases successfully tame the “inflation dragon”, the economy should improve later next year and we will go into 2024 on better footing than we are on going into 2023.

The top five economic stories of 2022—unless something dramatic happens in the next two weeks—were:

The Russian invasion of Ukraine: The Russian invasion of Ukraine has had a profound effect on the global economy since it began on February 24. Commodity producers, including Alberta, have benefited from higher prices but the overall impact is negative.

Price pressure: U.S. inflation hit 9.1% in June—the biggest 12-month increase since 1981. Inflation in Canada peaked at 8.1% in June—its highest level since 1983. Inflation has come down from these peaks, but remains well above the 2% target.

The end of cheap money: The answer to elevated inflation is higher borrowing costs. As a result, central banks around the world reversed course in 2022 and began hiking interest rates. The Bank of Canada was no exception, taking its policy rate from 0.25% to 4.25%.

Loonie loses steam: The value of the Canadian dollar compared to the U.S. dollar has been on a downward trend in 2022. The loonie was worth around 79 cents U.S. to start the year, but is currently around 73 cents. A lower loonie helps Canadian exporters and tourist operators, but makes things more expensive for consumers, travellers and importers.

Crypto crash: Illustrating the old investment adage that what goes up can come down, cryptocurrencies had a rough year in 2022. A Bitcoin token, for example, was selling for over US$67,000 at one point in November 2021 compared to under US$18,000 today.

A look ahead at 2023: delayed onset economic soreness

I don’t go to the gym as often as I should—in other words, it’s been years—but I know that “delayed onset muscle soreness” often occurs after a workout.

If we think of the interest rate increases that have taken place in 2022 as the workout, we are going to experience some significant “economic muscle soreness” in 2023.

The overall effect of the higher cost of borrowing will be slower economic growth, if not outright recession in some places.

There are good reasons to think that the pain will be relatively mild and short-lived, but there is no doubt that it will be real. And, if not everything goes as planned, “mild and short” could turn into “severe and prolonged.”

Alberta’s economy will be shielded from the economic drag—but not entirely—by our oil and gas sector and strong economic base.

With the above in mind, the top five economic stories to watch in 2023 are:

Sticky is tricky: Red hot inflation was a huge story in 2022 and will continue to be a factor in 2023. Will higher interest rates bring inflation rates down as hoped? Or will the war in Ukraine, supply chain disruptions and wage-price spirals keep inflation sticky?

Location, location, location: Housing markets in Canada (which vary greatly from place to place) have started to cool due to higher interest rates. It remains to be seen how much of a bite higher borrowing costs will take in 2023 as more mortgages come up for renewal and how different markets will perform as the economy slows.

Geopolitical chess is a mess: The Russian invasion of Ukraine shows no signs of ending, China and the U.S. are vying for power, OPEC is restless, recession looms over Europe and the decades-long experiment in more—rather than less—open global trade is under serious threat. How a small but mighty trading nation like Canada positions itself on this global geopolitical chessboard is not clear, but 2023 will continue to present challenges in this regard.

The (last?) new oil pipeline out of Alberta: Regardless of where you stand on what to do about global carbon emissions, the future growth of Alberta’s oil and gas exports are constrained by a lack of additional pipeline capacity out of the province. The TransMountain pipeline expansion project is an exception to this rule. The project is scheduled to be completed toward the end of next year and will take the capacity of the pipeline from 300,000 barrels per day to 890,000 barrels per day.

Labour shortages: The slowing of the economy in 2023 will put upward pressure on the unemployment rate, but the widely reported labour shortages of 2022 will continue if not get worse 2023 and after. The main driver of this is the aging of the population. There are plans to increase immigration to address the shortfalls, but an overly “tight” labour market will take time to loosen.