Jobless rate could be lowest in 50 years

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'There is still some sting in the tail from wages and housing that could lead to firmer inflation lasting for some time' -- Douglas Porter, chief economist, BMO Financial Group

Economic forecasting is a complex business at the best of times, but trying to read the portents of a global economy in recovery from a pandemic has made it even more complicated.

“This is one of the more complex economic environments certainly encountered in my career as an economist,” Douglas Porter, chief economist for BMO Financial Group, said Tuesday at a session on financial and commodity markets at the Association of Mineral (AME) Roundup conference.

Generally, the signs are good, though the signals may be complicated somewhat by things economists have not had to factor in for decades, like high inflation and high employment.

“We think that, by later this year, we could be looking at the lowest jobless rate that we’ve seen in more than 50 years in both Canada and the U.S.,” Porter said.

Though a global pandemic hasn’t been officially declared over yet, financial markets are operating as though it has.

“Even with the ripple that we’ve seen in equity markets since the start of the year, largely speaking financial markets are still pointing towards relatively robust growth as we go through this year,” Porter said.

While there is always the possibility of yet another virus mutation and another wave of pandemic lockdowns and border closures, Porter said “we suspect that it’s going to become less of an economic driver through 2022.”

“Above and beyond the pandemic, markets have also had to concern themselves with the upsurges that we’re seeing globally in inflation and the prospect for higher interest rates. And, as if that wasn’t enough, of course we’ve been dealing with all kinds of geopolitical concerns, front and centre of which has been the Ukraine.”

The global economy grew by 6% in 2021, according to the International Monetary Fund (IMF). The global economy is expected to grow by 4.5% in 2022.

“That’s still above average growth,” Porter said.

The U.S. economy grew by almost 6% in 2021, the strongest growth since 1984, Porter said. Canada's GDP growth numbers for 2021 are not out yet, but generally Canada's growth lagged the U.S.

“I don’t think there’s much mystery what’s going on here,” Porter said. “Essentially Canada’s been dealing with longer lasting and more intense restrictions than the U.S. has.”

Commodities have been on fire since mid-2021, with everything from oil to lumber soaring. High oil prices in particular are helping drive up the consumer price index, and home prices that spiked roughly 20% in the past year in Canada and the U.S. will also feed the inflationary fires.

“This is not just a North American story,” Porter said. “We are seeing strong gains in consumer prices almost across the emerging market and most of the advanced world. Even Japan, which has been looking at deflation, arguably, for about 30 years, is actually seeing inflation of almost 1%, which is relatively high for Japan.”

U.S. inflation rates are among the highest, at 7%.

Benchmark oil prices are well above US$85 per barrel. Porter said he thinks crude oil prices will settle around the US$75 to US$80 per barrel range. Even so, BMO expects inflation to linger longer than some economists initially predicted.

“Even with more moderate oil prices, with an improved supply chain situation, we are still looking at inflation in the range of 2.5% to 3% in Canada and the U.S. by late 2023, well above the sub 2% trend that we were seeing before the pandemic began.

“We still believe that by late 2023, we’re still looking at underlying inflation above the pace that we saw in the 10 years before the pandemic.”

He said central banks raising interest rates to tame inflation is almost guaranteed. Both the Bank of Canada and the U.S. Federal Reserve have said they will raise interest rates in March.

“We believe that, in both cases, once the central banks make the determination that it’s time to start raising rates, they’re not going to fool around,” Porter said.

“For the Bank of Canada, we think they’ll actually hike in the next four meetings by a quarter point per meeting. We’re expecting the Bank of Canada to raise rates a little bit above what they were before the pandemic, because they’re dealing with a more serious inflation episode.”

He said one of the biggest stories of 2022 for the economy is going to be employment – high employment, that is.

“We have a very serious imbalance on the labour market front,” Porter said. “Right now in the U.S. we’ve got almost 11 million open jobs, whereas the amount of people counted as officially unemployed are less than 7 million.

“So we’ve got way more open jobs than we do have people unemployed. Historically, that kind of imbalance points due north for wages, and we are starting to see wage pressures mount in the U.S.”

In Canada, there are about 1 million job vacancies, though slightly more than 1 million people unemployed.

“We are starting to see wage pressures begin to build in Canada as well,” Porter said.

Housing prices will likely continue to add to inflationary pressure, Porter said.

“Even if some of the reopening pressures do fade over the next year, even if oil pressures do stabilize, and even if the supply issues do improve, there is still some sting in the tail from wages and housing that could lead to firmer inflation lasting for some time.”