We present this Bennett Jones Spring 2022 Economic Outlook in a period of great uncertainty. A war in Europe and the ongoing COVID-19 pandemic, in addition to exerting a devastating human toll, have reverberated through the global and Canadian economies. How these and other external forces will evolve, and how policy authorities worldwide will respond, are unknowns that make the development of economic projections and business plans unusually hazardous.

What we do know, after a strong recovery of activity and employment from the period of COVID lockdowns, is that the world today is very different than only some years ago. In the period following the Great Recession, central banks and governments confronted a demand deficit and persistently low, below-target inflation. The opposite is true today. There is now a supply deficit. And correspondingly high, above-target inflation around the world, including in the United States and Canada.

Global supply was slow to adjust through the recovery to the rebound of demand. Supply chains were disrupted by lockdowns, worker absenteeism, and logistical challenges. Commodity prices trended upward, and then were pushed far higher by the effects of the war in Ukraine and by sanctions imposed on Russia. This contributed to widespread increases in input costs. Meanwhile, businesses confronted a fragmentation of the trade rule book resulting from uncoordinated policy responses to COVID and to the war, a tense geopolitical environment, heightened strategic rivalry between the United States and China, and rising protectionism. Re-shoring of activity also adds to costs. This would be a time for institutions like the G20 and the World Trade Organization (WTO) to help. But they are largely missing in action.

Domestic policies also contributed to inflation. Exceptional monetary and fiscal support was absolutely necessary to prevent more serious and lasting damage from the pandemic, but now strong demand is meeting a supply-constrained world. In the United States and Canada, there are generalized labour shortages. Wage pressures are building up. And firms are passing on higher costs for inputs and labour to consumers. In Canada, buoyant demand for housing, against a limited supply, has pushed prices to levels that appear out of reach of a new generation of prospective buyers.

Unfortunately, the policy prescription for correcting the imbalance between demand and supply is not a pleasant one. Both fiscal and monetary policies must be oriented towards dampening domestic demand. Central banks have to raise interest rates in order to discourage borrowing. Governments have to allow inflated tax revenue to reduce real income growth, and they must avoid large discretionary spending to shield consumers from rising prices. Such shielding, while popular, would shift more of the onus of demand adjustment to central banks which would then have to increase interest rates even further. The higher rates would hurt households (especially those with high mortgage debt) and businesses which must make investments in productive capacity.

As a large energy and commodity exporter, Canada has the benefit of some offset to higher input costs. It is earning added income. Moreover, it can be part of the solution for partners who seek reliable and responsible supply of energy, grain, critical minerals and other commodities to reduce their dependence on Russia or other sources. It matters what we do with the added export revenue. If it is simply paid out to shareholders, the economic benefit will be modest and perhaps short-lived. If it is reinvested in productive capacity, in technology, and in decarbonization, we can strengthen our long-term prospects.

So there is a fair amount that we know. But that does not tell us where the economy will go over the next 24 to 36 months. All will depend on how such factors as the war in Ukraine, the pandemic, geopolitical conflict, capital markets or consumer and business expectations will evolve and interact. While the general prescription of demand restraint is clear, central banks and governments will have to be prepared to adjust policy in response to events as they unfold.

In a period of such uncertainty, there is a range of possible futures that are equally plausible. That makes the business of planning more difficult. One has to consider more than one scenario, be ready to capitalize on opportunity, but also be prepared for adverse events.

To assist businesses in this exercise, we present two scenarios for the period to 2024, one optimistic, one pessimistic, both plausible and by no means the end points of what is a wider range of possible futures.

In the optimistic scenario, global forces and the expectations of consumers and businesses work in such a way as to facilitate the balancing of demand and supply. With some monetary policy tightening to the end of 2022, the U.S. and Canadian economies manage a soft landing and by mid-2024, inflation is back at 2% and output is on a trajectory roughly consistent with potential.

In the pessimistic scenario, forces move the other way and hence central banks have to take more aggressive action. The U.S. economy goes through a mild recession in 2023 that Canada narrowly escapes. Both economies still get back on course by the second half of 2024, but the ride is bumpier.

These two scenarios are simply illustrative, helping to draw out the interaction of global and domestic factors that will impact Canadian economic performance to the end of 2024.

As governments and businesses assess these and other scenarios, and prepare accordingly, there must also be a focus on the longer term and on investment necessary for a competitive, sustainable economy. With this economic outlook, we issue four companion papers—dealing respectively with the trade and investment environment, commodity markets, the labour market, and digital money—that help bridge short-term prospects and conditions for long-term prosperity.

We hope our analyses will be helpful for businesses as they plan their operations and investments.