Highlights for the first quarter1 of 2022
- Central banks took action to control inflation
- Economies worldwide continued to gain strength as pandemic concerns eased.
- Several central banks raised interest rates in response to rising inflation.
- Some central banks moved to reduce or end their asset purchase programs.
- Global equity markets declined
- Investors expressed concern about the conflict between Russia and Ukraine.
- Parts of Asia and Europe felt the effects of a new COVID-19 variant.
- Many commodity prices rose
- General issues related to supply and demand caused oil prices to soar.
- Global sanctions against Russia led to supply shortages of various commodities.
- The price of gold rallied as investors sought the safety of gold amid global turmoil.
Central banks responded to rising inflation
A continued rebound in global economic growth pushed inflation higher. Rising costs prompted central banks to take action. They changed their monetary policies and accelerated interest rate increases.
The Bank of Canada (BoC) and U.S. Federal Reserve Board were among the central banks to raise interest rates during the quarter. The Bank of England raised its key policy interest rate twice.
The Bank of Japan and European Central Bank (ECB) held their policy rates steady. The ECB announced it would likely end its asset purchases ahead of schedule in 2022. The ECB also suggested it may need to raise interest rates in 2022 to help contain inflation.
How are major economies doing?
Major economies across the globe expanded amid increased spending by consumers and businesses:
- The U.S. reported that its economy grew by 7.0%.
- Europe’s economy grew by 0.3%.
- Japan’s economy expanded by 4.6%.
- China’s economy slowed for a third straight quarter, but still grew by 4.0%.
Financial markets lost some momentum
Many global equity markets declined over the first quarter of 2022.
- Markets in the U.S. and China were among the notable losers.
- Japanese and European markets lost value as well.
- Canada and the U.K. actually saw their markets advance.
How is inflation affecting the economy?
Higher inflation weighed on investor sentiment early in the period. These concerns led to expectations of widespread action by central banks around the world to help stem inflation.
Yields on U.S. and Canadian long-term government bonds moved higher over the quarter as a reflection of rising inflation.
How is Russia’s invasion of Ukraine affecting markets?
Increasing geopolitical uncertainty dominated the latter half of the quarter. Russia’s invasion of Ukraine had a negative impact on markets. Investors were uncertain how this conflict and the financial sanctions imposed on Russia may impact economic growth.
What happened to the price of oil in 2021?
Oil prices surged to their highest level since 2008 at one point during the period. Supply challenges arose as the U.S. sanctioned a ban on oil imports from Russia.
What happened to the price of gold in 2021?
Gold was another commodity whose price advanced over the period. This price increase was a response to the unstable geopolitical and economic conditions.
How are Canadian markets doing?
Economic growth in Canada benefited from continued strong business investment and rising commodity prices.
- Canada’s economy grew at an annualized rate of 6.7% in the fourth quarter of 2021. This was higher than the 5.5% annualized expansion in the third quarter.
- Economic activity in Canada was strong at the start of 2022. The trend stalled mid-quarter as protests at the Ambassador Bridge to the U.S. raised concerns about supply-chain issues. The ensuing traffic closure had a particularly negative impact on the automotive industry.
- Pandemic lockdowns caused job reductions in January in Canada. The labour market improved in February as new jobs pushed the unemployment rate to its lowest level during the pandemic. The addition of 337,000 jobs in February was Canada’s best increase since February 2020.
- Canadian equities advanced over the quarter and the S&P/TSX Composite Index reached a new record high.
- The energy and materials sectors were especially strong. They helped lead the market in Canada.
- Canadian bond prices declined as inflation rose and monetary policy became tighter.
- The BoC raised its benchmark overnight interest rate to 0.50%.
- This was the first interest rate increase since 2018. It came in response to surging inflation and a robust labour market.
- The inflation rate in February of 5.7% (year-over-year) was the highest in 30 years.
What can investors expect in the future?
Here are some highlights of the major factors affecting the world and Canada’s economy:
|Geopolitical uncertainty surrounding the Russia-Ukraine conflict poses significant concerns about the global economy.
|Economic activity is also slowing in parts of the world as a new COVID-19 subvariant has revived some lockdown restrictions.
|The removal of stimulus measures both by governments and central banks may serve to control inflation and slow economic growth.
The price of oil may remain elevated in response to persistent supply concerns.
The disruption in Russia’s oil production amid broad sanctions could push prices higher as well.
|The Canadian consumer remains strong but higher prices may hinder spending in the months to come. The ongoing pandemic and the conflict in Ukraine also remain risks to the Canadian economy.
|Canada’s real estate market may remain robust. However, demand could be hampered by rising interest rates and high prices. Strong price growth over the past year has caused concerns about general affordability.
|Canadian interest rates
Canada may experience several more interest rate increases in 2022 as the BoC expects inflation to remain elevated.
Surging gasoline prices and rising costs for food and shelter have been major contributors to higher consumer prices.
1A quarter refers to a three-month period:
- The first quarter (Q1) covers the months of January to March.
- The second quarter (Q2) covers April to June.
- The third quarter (Q3) covers July to September.
- The fourth quarter (Q4) covers October to December.
This commentary contains information in summary form for your convenience. Although this commentary has been prepared from sources believed to be reliable, Sun Life can’t guarantee its accuracy or completeness. Plus, this commentary is intended to provide general information and should not be seen as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life. Please note, any future or forward-looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated.