March 2022 economic briefing: A look at labour markets and inflation

March 2022

As the Omicron wave recedes, we explore the remaining effect on our Canadian labour markets, as well as the overall state of the economy. Though supply chain issues continue, and inflation is expected to remain high, Canada’s gross domestic product (GDP) has rebounded to pre-pandemic levels and labour market indicators are encouraging. The main concern is now geopolitical uncertainty.

Learn what this means for business.

The Economic Briefing at a Glance

1. Labour markets should bounce back after Omicron. Prior to Omicron, most labour markets were showing low unemployment and the number of women in the workforce had hit historic proportions. Canada is experiencing job turnover in the hardest-hit sectors with workers favouring sectors less affected by the pandemic. Labour shortages have increased significantly during the pandemic—growth seems to have plateaued, but shortages remain high.
2. The level of economic growth remains uncertain. After the GDP rebounded to pre-pandemic levels at the end of 2021, economic activity in Canada slowed down with Omicron and now Russia's invasion of Ukraine overshadows GDP growth for 2022.
3. Supply chain disruptions will be felt throughout 2022. Supply chain issues have been further affected by acute labour shortages during the Omicron wave, and now geopolitical uncertainty is disrupting global supply chains.
4. The Bank of Canada has started to control inflation with higher interest rates. Driven by supply chain issues and strong demand, inflation is expected to remain high in 2022 and central banks will be raising interest rates multiple times to control inflation.

The Main Takeaway

While Canada seems to have reached a plateau on job shortage growth, labour shortages will be an ongoing concern for Canadian businesses as they are facing an employee’s market. This highlights the important roles that worker retention and attraction play in meeting labour needs for businesses.

Competitive salaries and benefits remain central in attracting and retaining employees, and hybrid work arrangements and flexible hours play bigger roles than ever before. It’s becoming increasingly important for businesses to reduce employee turnover, including keeping aging workers on the payroll. Staff turnover is costly for the organization both from a training perspective as well as lost human capital.

By reaching its ambitious immigration targets for 2021, as well as implementing childcare acts with provinces, the federal government is adding more potential workers to the workforce which may combat labour shortages.

The Economic Briefing in Full

Canada’s Labour Market

The significant pandemic-related labour shortage seems to have plateaued

The most recent data shows close to 896,000 job vacancies in Canada, which is 300,000 more than before the pandemic, but lower than the one million job vacancies recorded in September 2021. To put it in perspective, job vacancies account for 5.2 per cent of payroll employees. Over 60 per cent of vacancies are positions that require a high school diploma or no education. Unsurprisingly, sectors with lower wages generally have more vacant positions, with food and accommodation services leading the pack. Job vacancies in highly skilled, essential services or production tend to be more problematic for our economy.

This major jump in job vacancies can partially be attributed to a 30-year low in immigration rates at the start of the pandemic. Not only were fewer immigrants entering Canada, but more non-permanent residents also left Canada in 2020. In 2021, the downward spiral was reversed by adding 401,000 new permanent residents. Canada’s labour strategy includes a heavier focus on immigration than the United States, so our labour shortages have typically been less problematic.

The intensity of labour shortages, tracked using the number of unemployed people per job vacancy, varies across the country. The Canadian average stands at 1.4 unemployed people per job vacancy, but this ratio is lower in British Columbia and Quebec. The Maritime provinces and Alberta have the highest ratios which indicates more friction in their labour markets. This could indicate a mismatch between unemployed people and job vacancies.

We could see acute labour shortages or short-term unemployment attributed to the rise of Omicron during winter 2021, but it should not lead to long-lasting shortages or unemployment.

Labour markets slowed down with Omicron, but they should recover quickly

Canada has close to 60,000 more jobs than before the pandemic. Job growth was much higher prior to Omicron. The Omicron wave led to a loss of 200,000 jobs and a 0.5-point unemployment rate increase to 6.5 per cent in a month. Recent job losses are heavily weighted toward part-time work, which typically impacts younger workers and women more severely. The impact of Omicron’s spread was visible in January 2022, where one out of ten workers were absent due to illness or disability. Remote work continues to be very prominent with 25 per cent of the labour force working exclusively from home.

On the other hand, the employment rate for 25- to 54-year-olds remains higher than it was two years ago indicating an even more active workforce core. Even with Omicron’s effect on the employment rate among women, it remains higher than pre-pandemic levels amongst 25- to 54-year-olds. Omicron will likely have a short-lasting impact on the labour market, and we should return to the historic high employment rate reached in early December 2021 for women. This is encouraging especially in the context of financial support for childcare that is getting implemented across many provinces which could further increase the employment rate amongst women.

Recovery remains uneven across sectors

Canada as a country does not seem to be experiencing what is being dubbed the “Great Resignation” because workers remain active. A more appropriate term for the Canadian experience may be the “Great Turnover.”

As reflected in the following graph, workers have primarily left sectors that have been hardest hit by the COVID-19 restrictions. The graph displays job number and vacant position differences from prior to the pandemic. Food and accommodation services have suffered the worst decline with 332,500 fewer jobs overall as well as 69,800 vacant positions, resulting in a net loss of 262,700 positions. On the other end of the spectrum, professional and technical services have grown significantly with 168,700 new jobs and 20,900 new vacant positions. A few sectors show job growth alongside rising vacant positions illustrating a healthy labour demand. Government restrictions related to Omicron put additional downward pressures on food and accommodation services, and the rapid spread of Omicron led to a small increase in open positions in health care services.

GRAPH 1: JOB AND VACANT POSITION DIFFERENCES WITH PRE-PANDEMIC LEVELS (IN 000’S)

Canada’s Economic Growth and Recovery

Economic growth will be stunted in early 2022 and rebound is uncertain

In November 2021, Canada showed a 0.2 per cent increase in economic activity (expressed in GDP) as compared to February 2020, indicating a complete economic recovery from the pandemic. Closer scrutiny shows that recovery was uneven. While some sectors show growth, others – notably food and accommodation services, entertainment and arts – remain hard hit. Omicron-related restrictions have further hindered the recovery of these sectors, which could remain below pre-pandemic values throughout 2022.

Overall economic growth will be stunted in early 2022, but we can expect the economic impact of Omicron not to spill over into the second quarter.

The pandemic’s impact has been replaced by geopolitical uncertainty

Russia’s invasion of Ukraine has now replaced COVID-19 as the main concern for Canada moving forward. Even if Russia and Ukraine’s economies are fairly concentrated on natural resources and agriculture, the spillover impacts for Canada through European economies remain unknown. We could see a prolonged growth that is slower than expected for the rest of 2022.

Supply Chain Issues and Inflation

Supply chain issues unlikely to improve in spring 2022

Omicron-related lockdowns affected in-person services and led to an increase in the consumption of goods which has strained global supply chains. We see issues emerging from inputs and intermediate goods in both availability and price. As an example, a shortage of semiconductor chips has created issues within the auto industry. The raw material price index rose by 30 per cent in 2021 illustrating these issues.

The strong transport demand has led to major increases in freight prices and in traffic, causing overall delays for boat transport, air transport and trucking. This has resulted in a lack of availability of final goods for consumers and, in some cases, price increases. The inventory to sales ratios in the United States shows a low level of available inventory in American businesses.

As Omicron’s impacts on supply chains is diminishing, we can expect the Russia-Ukraine conflict to take its place disrupting global supply chains. With Russia often referred to as the gas station for Europe, we can expect oil and energy prices to remain high. As for Ukraine, altered wheat exports could affect food supply among its trading partners, notably the Middle East. Once again, the ensuing impacts for Canada have yet to be determined, but we can safely expect that current supply issues won’t go away sooner than was predicted before the armed conflict.

GRAPH 2: INVENTORY TO SALES RATIO (UNITED STATES)

Supply chain disruptions should drive inflation, which could remain high for most of 2022

Inflation is rising quickly after a stagnant 2020, reaching more than 5 per cent year over year in January 2022. Notably, similar increases have not occurred since the early 2000s. Increases are led by the rising cost of energy, food and goods. It is important to note that price hikes in 2021 shown on a year-to-year basis are occurring in the wake of the price stagnation seen in 2020. Forecasting expects inflation to remain high throughout most of 2022, especially amid the Russia-Ukraine conflict. It’s the length of high inflation in 2022 that is most concerning because yearly increases are calculated over 2021 values, which were already significantly above 2020 values. This will further increase inflation above the central bank long-term target rate of 2 per cent.

GRAPH 3: CONSUMER PRICE INDEX (CPI), 2002=100

Bank of Canada has started raising interest rates to rein in inflation

With the economy having mostly recovered and a very active labour market, the Bank of Canada has started to raise interest rates to control inflation. The central bank in the United States should also raised interest rate shortly because inflation is even higher in the United States. Financial institutions across Canada expect overnight rates to rise in the first or second quarter of 2022 reaching a minimum of 1 per cent in 2022 and possibly 1.75 per cent by the end of 2023. Note: The overnight rate is the rate at which major financial institutions can borrow and lend short-term funds to one another. It drives interest rates in Canada for consumers and businesses.

GRAPH 4: FORECASTS OF CANADA’S OVERNIGHT RATE (IN %)

Interest hikes will consider the unprecedented levels of debt in Canada

Supporting households and businesses during the pandemic has been relatively costly, especially for the federal government. The provinces and territories have also had to cope with lower revenues and higher health care costs which have led to the governments of all levels holding an increased level of debt.

Household debt has also been on a steady rise since the early 2000s, a rise that is associated with bigger mortgages due to increased housing prices. The level of household debt (in percentage of GDP) is comparable to U.S. household debt prior to the 2008 recession. This means that the Bank of Canada has little wiggle room for interest hikes to control inflation in the coming years.

GRAPH 5: GOVERNMENT AND HOUSEHOLD DEBT (AS A PERCENTAGE OF GDP)

Canada’s housing market growth is at the very least concerning

Housing prices rose throughout 2021 and they keep rising in 2022. Housing costs in January 2022 were 21 per cent higher than in January 2021. The prices in metropolitan areas are typically a driving force in the average price increase of a home in Canada. Relatively low interest rates and the rise of remote work are creating similar price increases among non-metropolitan areas. The Maritime provinces are facing worrying price increases. Even if prices stabilize at their current level, housing affordability will continue to be a concern in most of Canada.

New home construction has been booming since the beginning of the pandemic, occurring at levels unseen since the 1980s. Despite the added inventory, new housing prices are still up 14 per cent on a year-to-year basis indicating the housing supply needs of Canadians. Moving forward, rising construction prices will be part of the equation. We’ll have to wait and see if Canada can keep up the current rate of housing construction especially with rising interest rates and the shortage of construction workers.

TABLE 1: HOUSING STATISTICS ACROSS CANADA

References

Graph 1: Statistics Canada, Table: 14-10-0355-02, Table: 14-10-0372-01

Graph 2: FRED Economic Data

Graph 3: Statistics Canada, Table: 18-10-0004-13

Graph 4: Forecasts from financial institutions, as presented in January 2022

Graph 5: Statistics Canada, Tables 36-10-0222-01, 11-10-0065-01 and 36-10-0467-01

Table 1: CREA, https://www.crea.ca/housing-market-stats/national-price-map/