What's in the cards for 2022? Economist Jimmy Jean looks at inflation, interest rates and financial markets

With the pandemic still front and centre, what can we expect for the economy in 2022? Jimmy Jean, Desjardins's Chief Economist and Strategist, tells us what's on his radar.

First off, the inflation that surprised everyone in 2021, as much for how high it went as for how long it has stuck around. But the economist expects inflation to come down over the next few months. "Some of the factors that led to the spike should calm down, like energy prices, which could drop due to an anticipated surplus in the oil market. We might also see fewer blockages in supply chains, particularly in the auto sector," says Jean.

But we're still not out of the woods. There are other factors that could cause inflationary pressure, like higher wages that would force companies to increase the cost of their products, and the cost of housing, which continues to climb. "We can't ignore the potential for more surprises either, like the Omicron variant," says Jean. "We might see inflation of 5% in Canada and 7% in the United States during the first half of the year. But both the Bank of Canada and the Fed expect it to start normalizing after that."

An eye on debt

Despite the pandemic, the financial situation of many households actually improved in 2020, while average household debt and savings both grew. "It's important to note that the spike in savings was largely concentrated in homes that were already financially secure," says Jean. "Higher inflation and expected interest rate hikes could make things even harder for households that already have very high levels of debt. And we did see some indicators start to fall off last year; debt rates started climbing again while saving rates started slipping."

Everything points to the Bank of Canada increasing interest rates earlier than originally expected. "It might be as early as April of this year, much earlier than what they'd originally telegraphed a year ago," says Jean. "Several central banks are planning to announce higher rates over the next few months. The Bank of England already did it in December. But it will be gradual, so as not to shake up the economy."

A cooling housing market

Higher interest rates will definitely affect the housing market, which looks like it will stay robust in the months ahead. With sustained housing starts, Jean thinks we can expect a better balance between supply and demand by the end of the year. However, the low housing inventory we're seeing right now means the upward pressure on real estate prices is here to stay in the near term.

"Prospective homebuyers who were waiting for prices to drop are going to be disappointed," says Jean. "The interest rate hikes telegraphed by the Bank of Canada means people will be tempted to buy sooner rather than later. The tighter mortgage lending rules Canadian financial institutions implemented last year will be put to the test. Buyers are going to need their down payment and be able to demonstrate their ability to withstand higher interest rates."

Those higher rates will have a bigger impact in markets where affordability is very low, like areas of British Columbia and Ontario. Housing prices have continued to climb over the last few months. "BC and Ontario both have ambitious immigration targets, so those housing markets will remain very active. However, rising prices could lead a lot of prospective buyers to think twice," says Jean. 

Caution in the markets

After several consecutive months of gains, volatility came back to the markets at the end of 2021. Accelerating inflationary pressure and changes to monetary policy by central banks shook investor optimism. Investors should be cautious, especially people who have already retired or are almost there.

"They should be looking to invest in safe value, companies that offer good dividends or aren't affected by interest rate hikes," explains Jean. "The banking sector should present some attractive investment opportunities."

And watch out for tech stocks. "Tech companies are more vulnerable to rate hikes and are watched closely by regulators," says Jean.

For the full economic study: What to Watch Out For in 2022 Post-Pandemic Progress... We Hope!