In 2021, the provincial economy emerged from the pandemic in decent shape considering that many consumer services and most travel remained partially shuttered and international trade had not fully recovered from earlier COVID-induced disruptions. But in 2022, B.C. and the world faced several unusual challenges.
The big story was inflation.
The all-items Consumer Price Index (CPI) surged to 40-year highs, owing to the lingering effects of COVID, the onset of war in Europe, and ongoing – and in retrospect, clearly excessive – fiscal and monetary stimulus. At the start of the year, Canada’s CPI inflation rate was clocking in near five per cent. By mid-year, it had climbed to more than eight per cent. As 2022 wound to a close, inflation was still running close to seven per cent – two-and-a-half times the Bank of Canada’s two per cent target.
Canada’s economy, in common with the U.S., has been operating “above capacity,” with the demand for goods and services outstripping supply. Underlying price pressures were exacerbated by Russia’s invasion of Ukraine and the subsequent energy and global supply chain shocks. Neither policymakers nor forecasters saw these coming. However, national governments and central bankers were slow to digest the implications.
In B.C., the inflation picture differs somewhat from in Canada as a whole. Here, the overall CPI was rising by 4.3 per cent at the beginning of 2022, somewhat below the national rate. But by year’s end, B.C. inflation had risen to 7.8 per cent – almost a full percentage point above the Canadian figure.
Higher inflation in B.C. has been driven in part by steeper year-over-year increases in the price of “owned accommodation” as well as in transportation (with gas prices in B.C. up 30 per cent year over year compared with 18 per cent nationally). A higher inflation rate suggests our economy became even more overheated than Canada’s in 2022. This means B.C. policymakers should be paying more attention to expanding the economy’s supply-side potential. Instead, like their stumbling counterparts in Ottawa, they have been preoccupied with supporting and stimulating spending and consumption.
In response to spiking inflation, the Bank of Canada raised its short-term policy rate on seven occasions in 2022, taking the overnight rate from a rock-bottom 0.25 per cent in early March to 4.25 per cent by December. Further increases are all but guaranteed next year. The dramatic increases in borrowing costs engineered by the central bank have started to weigh on indebted households, especially those with variable or recently renewed mortgages. In the coming year, the higher cost of credit will begin to crimp investment spending as well, pushing the overall B.C. economy into a visible slowdown.
Higher borrowing costs quickly showed up in real estate markets. In early 2022, borrowers could get secure a five-year mortgage for 3.45 per cent. By December the comparable rate was almost six per cent. Resale activity fell markedly in 2022, and home prices began to soften – a trend that is expected to continue in the coming months.
In 2022, B.C.’s labour market also shifted into uncharted territory. As the unemployment rate move steadily lower in 2021-22 and hiring continued, reported job openings soared well above the number of unemployed people in the province. This unprecedented situation emerged last spring, affecting most B.C. industries. Job openings have been particularly plentiful in food services, accommodation, construction, truck transportation and parts of retail. More recently, hiring and job creation have slowed, and vacancies have dipped. As the economy slows in 2023, labour market conditions are likely to “normalize” somewhat, such that the number of job seekers again exceeds the number of job vacancies.
For B.C., one of the most significant developments in 2022 was the acceleration of population growth from the 1.5 to 1.7 per cent annual rate typical of the past few years, to 2.2 per cent recently – the fastest pace since the mid-1990s. This mainly reflects a steep rise in federal immigration targets, although interprovincial migration has also been a factor. Another important demographic shift in 2022 was the “natural” component of population growth turning negative. By late 2021, the number of deaths in B.C. exceeded births, with that pattern becoming more entrenched in 2022. This underscores the reality that immigration is now the only thing standing in the way of a shrinking Canadian population.
Jock Finlayson is the Business Council of British Columbia’s senior adviser; Ken Peacock is the council’s senior vice-president and chief economist.