Ashleay: 2022 had a few surprises in store for us, and economists had a busy year. As the year draws to a close, it’s time to take a look back at the past 12 months. My name is Ashleay. I’m here with Sébastien Mc Mahon, Chief Strategist and Senior Economist at iA Financial Group, and Marc Gagnon, Vice-President, Portfolio Manager for North American Equity at iA Financial Group. Marc and Sébastien, thank you for joining us today.
Marc: Oh, thank you. It’s a pleasure for me to be here, Ashleay.
Sébastien: And it’s great to be here. It’s great to be with you, Marc. It’s not every team that features one of the top portfolio managers in the country. This year, you won the Top Gun Award for portfolio managers for Canadian equities. Is that right?
Marc: Yes, that’s right.
Sébastien: All right. So it’s good to have the best in the business with us today.
Marc: You’re only as good as your last year, I guess.
Ashleay: And so, gentlemen, how would you qualify the past year?
Sébastien: That’s a good segue. Since you’re only as good as your last year, I would say that we expected 2022 to be the year of uncertainty. 2020, of course, was the year of the virus; 2021, the year of the vaccine. But now that the year is almost over, I’d say that 2022 was the year of the hangover in reference to the after-effects of all the medication that was injected into the economy following the pandemic. That’s how I would qualify it. How would you qualify it, Marc?
Marc: I agree, Sébastien, it was quite a hangover. We know that central banks had to lower interest rates during the pandemic because the situation was extremely serious. A lot of money was thrown at the economy. Everybody got their “cheque in the mail.” It was an extreme time that required extreme measures to make things better. And the effect of such measures is what we’re experiencing today. That’s just Economics 101. When you throw too much money at a hot economy, what you get is inflation. That’s where we are today.
Sébastien: Yes, and no one knew exactly what package of solutions to deliver. No one knew. As a result, the authorities’ response to the crisis was far from perfect. They even consulted us in the private sector. While we gave advice, we were happy not to have to make the hard decisions. In all likelihood, we avoided an economic depression. We got about 7 or 8% inflation and market volatility instead. As you suggested, Ashleay, 2022 was an eventful year.
Ashleay: Absolutely. And it’s hard to talk about 2022 without discussing COVID.
Sébastien: Exactly. We’re still struggling with COVID. Personally, I’ve just recovered from the infection, which accounts for how I sound. We may think COVID is past, but just look at the stats. In China, for instance, you see that there have never been as many COVID cases as are now reported officially. In the United States, we know that the number of employed people absent from work due to illness is at an all-time high. So COVID was omnipresent in 2022. I don’t know if you agree, but it’s likely we’ll still be discussing COVID in 2023 and 2024.
Marc: Yes. Also, unfortunately, we’re just starting to realize what the effects of long COVID are, and how many people are suffering from it. There are people who are still affected by the virus nine months after being infected and still dealing with the consequences of the illness. We have to take this phenomenon into account when we try to explain the current labour shortage. We started the year with a rise in the Omicron variant, but things have improved in North America and Europe. China, however, is still struggling with the virus. China was late in reopening its economy, which it is now trying to do. But it’s not going to be easy.
Sébastien: No. China’s zero-COVID policy was a huge headwind for the global economy. China’s economy accounts for 20% of global GDP growth. For every dollar of new GDP every year, 20 cents come from China. When China terminates its zero-COVID policy, the result will be a huge tailwind for the global economy with huge potential for growth. But in light of commentators’ viewpoints and the political and economic situation, it’s unlikely that China will terminate its zero-COVID policy in late 2022 or early 2023. Right?
Marc: Yes. China needs to “re-open” to boost its economy, but it has to guard against doing it too quickly. A significant portion of its population is older and does not have the protections that people in North America and Europe enjoy. China knows this and has to move forward cautiously. It’s not going to be easy.
Sébastien: Yes. COVID still has a major impact on the global economy. Sometimes, you hear people say they look forward to living in a post-COVID world one day. But is there such a thing as a post-COVID world?
Marc: I think COVID will stay with us. The impact of the virus is that things won’t go back to what they once were. There are some positive changes, for example, working from home. I don’t know about you, Sébastien, but from time to time I enjoy working in sweatpants. No one sees that, of course. Working from home allows me to be more productive because I can fit in more meetings, you know? That’s one of the positives. So, no, things won’t go back to what they were.
Sébastien: Exactly. It’s just like post-911. We’ve become used to more security measures at airports and a greater focus on national security. We’ve learned to live with these changes. We think of them as normal. Similarly, COVID has impacted supply chains, boosted reshoring, and affected other economic issues. As a result, the world will never be exactly the same as it was.
Marc: That’s a good point.
Ashleay: Another topic that has stolen the show in 2022 is inflation. I’ve never heard so much talk about inflation in my life.
Sébastien: Of course, you’re very young.
Ashleay: Of course.
Sébastien: I’m 43, and it’s the same for me. I’ve never heard so much discussion about inflation. The last time we had strong inflation was in the early 1980s, and I was just a baby then. Generally, there are three types of inflation. There’s supply-driven or cost-push inflation. That’s what we had initially when parts of China and Asia began to close down. As an example, to build cars, you need parts that come from everywhere around the world. And if the supply of parts is impaired, car manufacturers have to pay more for the parts. Of course, they pass this cost on to consumers. Cost-push forces resulted in higher transportation costs. The good news is that most cost-push forces are now a thing of the past. Some are still present, largely due to China still being closed. As for demand-driven inflation, spurred by people having more money and spending it – on restaurants and on various goods – is also fading. Higher prices are taking a large bite out of our purchasing power. That helps to dampen demand-driven inflation, which is good news. Higher prices, however, also have an effect on wages, which are also rising, thereby pushing inflation even higher. As a result, we end up with a spiralling effect. We’re still in it, which is why central banks have been hiking interest rates.
Marc: Yes, as you say Sébastien, a lot of things are happening on the inflation front. People do want an increase in salary to restore their purchasing power, which they fear is slipping away. That’s normal. But this is the point at which inflation may become entrenched. That’s the problem that central banks want to avoid. One event that has worsened the situation is the war in Ukraine. Very few people thought that Russia would actually invade Ukraine, but even fewer could have predicted that the war would last as long as it has.
Sébastien: More than a week.
Marc: That’s right, more than a week. It’s a very serious situation. Fierce fighting and, unfortunately, many people killed. The situation has had consequences also on the flow of commodities in Europe, with cuts to oil and natural-gas supply. Germany, for example, depended on Russian gas and has had to do without it. The same applies to food supply, which was affected by the rising price of wheat, corn, and other grains. In Canada, food inflation is at 10%. That’s a lot! It affects everyone, of course, because everyone has to eat.
Sébastien: We could foresee that the situation in Ukraine would have an effect on commodity prices, but the sustained impact on inflation has become apparent only in hindsight. Without the war in Ukraine, inflation would already have come down to the targeted levels. But other issues affect inflation, for example, droughts around the world fuel food inflation. In general, climate change, which seems to have moved from theory to reality, will likely fuel inflation in the years ahead.
Marc: I think that’s why central banks around the world were caught off guard as much as they were. They were surprised at the incessant rise in inflation and they had to apply the brakes. They had to take forceful action. That’s why, as you’ve said, the speed at which interest rates have risen is unprecedented. Increases of 75 and 100 basis points. Amazing.
Sébastien: In the U.S., there were four consecutive 75-basis-point hikes.
Marc: Spectacular. I remember a time when a half-point rise was a very big deal. Now we’ve had a few 75-basis-point increases already. When central banks talk about raising rates by 1%, my reaction is “What!”
Sébastien: Yes, this year was certainly one for the history books.
Ashleay: Absolutely. Marc and Sébastien, thank you so much. That covers Part 1 of 2022 recap. But stay tuned for Part 2 here on our “IN YOUR INTEREST!” podcast from iA Financial Group. Love this podcast? Want to know more about economic news? Follow our “IN YOUR INTEREST!” podcast, available on all platforms. Visit the economic news page on ia.ca or follow us on social media.