There is no shortage of headwinds facing the global economy right now, from the war between Russia and Ukraine, to rising inflation and the ongoing COVID-19 pandemic. Kim Parlee speaks with Beata Caranci, Chief Economist, TD Bank, about the outlook for growth.
We've dedicated the whole show to you, Beata, to talk about all the things that are happening. I want to start off and structure the conversation a bit. I wanted it first to talk about the big complicated things that are happening, then to talk a little bit about the US economy specifically, and then the Canadian economy specifically. So let's start at the beginning.
- For those who aren't watching the moment by moment of what's happening with the Russia Ukraine crisis, can you tell us from an economic standpoint, what does this war mean for the global economy?
- Yeah, it's hard to put it into the full context right now, because we're still in the midst of it. What we're watching for, and it's really critical that when we have seen international conflicts-- not World War One, Two, but Gulf War, European financial crisis, Asian flu, those type of conflicts-- they tend to be short in duration ideally, like we're talking about a quarter extension, and not having large impacts on North America. Meaning the Canadian and US economy, because of that, because the direct links via trade are not substantive enough to cause any risk.
So from that perspective, this one could be quite different, because we're not quite sure yet-- and you only know this retrospectively-- if it's going to be short in duration. And most signals are telling us not likely going to be the case, at least when it comes to some of the disruptions we would expect to see in commodity channels, specific ones where Ukraine and Russia have large global shares, palladium, wheat, oil, and natural gas links into Europe. And so those are leading us to believe that there could be some longer extensions happening with markdowns to the European Economic prospects.
And for North America, as long as it doesn't migrate into a global financial risk, it should be able to withstand it from a growth perspective. But we are considering fairly substantial markdowns to the economic growth as we go forward the longer this goes on in time. But it's really hard to call it at this about a two week mark right now.
- Yeah, I know it's early. And I think the intent is to just really understand what you're watching to understand what the impacts might be. Obviously, the human toll has been horrific, and the human casualties we've seen so far.
The one thing I know that you've talked about that I thought is really interesting is you talk about disruption of supply chains, and inflation, and you think about these big disruptions happening in commodities. We're going to see inflation, but you talk about distribution of inflation. So the very people that are suffering the most, perhaps by the conflicts that are happening, are going to hit again when life becomes unaffordable, and that's a real risk.
- Yeah, so certainly if you're thinking through the European link. So first of all, I should make the point that when we look at inflation risks and the distribution, the highest inflation occurrence is happening inside the US simply for the fact that they have a higher reliance on supply chains, because the way they source their goods, and because they've been showing higher consumer patterns in areas that have already had supply chain risks. Then next would be Canada, and then Europe would be at a lower inflation point, even though they are now experiencing significant strains in terms of energy costs. Their starting point is actually lower than what you're seeing in North America. And so there's a little bit of room there to absorb some pressures.
But I think we've had a lot of focus in terms of what economists are talking about in the media on energy, but the other aspect is food. And to your point, when you look at those who struggle inside the economy, and they tend to be lower income individuals-- obviously, in Ukraine they're going to be displaced individuals now-- those folks, if you just take the US example, they're paying about an 8% inflation rate relative to any other group. And if you push on energy and food costs, which is happening now, they don't have the savings or the room to deflect income from other areas, other areas of expenditures. So it disproportionately puts a burden especially on lower income individuals globally and specifically inside regions that already have high inflation, like the US and to a lesser extent Canada.
- It's funny that never would have thought that I'd be having you on to talk about what is happening in the world and we wouldn't lead with COVID.
- But here we go. And so the other thing, of course, that's going on-- and I almost say it's a good inflation story, but I use that with an asterisk-- is that growth is returning, one would hope, with things getting back to with the new normal might look like. How is that looking right now based on what's happening with Russia and Ukraine? I mean, you've got all these crosscurrents happening right now.
- Yeah, that's exactly right. And in fact-- hopefully, this doesn't sound insensitive-- but in terms of the timing, it's not the worst timing for Canada and the US. The worst timing would have been at the peak of COVID economic shutdowns that were happening, job dislocations. We're on the other side, where there's very strong job demand in both countries. Wage growth is strong. And so there's an ability to absorb it.
And so that's an important element that I think when we turn on headlines-- putting aside the war images, which are horrific-- but when you're thinking through the market extensions, it's very distressing to see this degree to which oil prices have moved, wheat prices have moved. Like basically, the broad commodity index. At the same time, financially households are in a good position to absorb it now than, say even six months to 12 months ago. So there is more buffer economically within North America to absorb it.
And that's one of the reasons that when you start to see economic forecasts come out, they are not likely going to have the US and Canada in recession. They will likely have markdowns to the speed of growth. But the starting point was high. US and Canada were expected to expand at about 3.7% this year, so even if you do a markdown of 50, 60, 70 basis points, you're still looking at a 3% handle. Decelerating as we go through the year, but having that cushion, because of that reopening, that pent up demand that's allowed to come through.