With inflation in Canada hitting levels not seen in a generation, the cost of living has quickly become one of the country’s greatest concerns.
And while the war in Europe has sent oil and commodities prices soaring, exacerbating the problem in the short term, if history repeats itself a correction could be coming.
In an interview with Castanet News, UBCO associate professor of economics Ross Hickey noted that dramatic upward oil price shocks are often immediately followed by economic recession.
“When we get a recession… it creates deflationary pressure. The economy slows down and prices tend to drop, or at least not rise as fast,” he said.
Hickey pointed to the work of American economist James D. Hamilton, who has been drawing a link between oil price surges and recessions for years.
The OPEC embargo of 1973, Iran revolution of 1978, Iran-Iraq war of 1980 and first Gulf War of 1990 all severely cut the global supply of oil and were followed by economic recessions in North America.
Hamilton said in a recent blog post a 50 per cent reduction in Russian oil reaching the global market would represent a shock as big as any of those four examples. The United States and Canada have already banned Russian energy products and are urging Europe to do the same.
While inflation is making headlines daily and has become a political football, Hickey suggested it is a “third order concern given what is happening in Europe” behind the Ukraine conflict itself and its actual economic impact on GDP.
“What's going to happen is because of those high prices, economic activity is likely to slow down. And when that economic activity slows down, that puts deflationary pressure on prices,” he said.
Two weeks ago, the Bank of Canada raised its key policy interest rate to 0.5 per cent, marking the first hike in two years, and warned of more hikes to come to rein in inflation.
Hickey says he expects the central bank to stay the course and “largely ignore” the situation in Ukraine. While annual inflation of over five per cent demands interest rates be increased, a recession typically pushes them in the other direction.
“It’s very hard to say anything with a lot of confidence, but if the increased price of oil has a negative effect on the economy in real terms, in terms of GDP output, and leads to recession — that puts pressure, in some sense, on the central bank to lower interest rates.”
Hickey was somewhat pessimistic when asked to predict if harder economic times are coming for BC Interior residents.
“The overall trends that we have seen, I think, are going to continue,” he said. “And those trends are not very good.”
He pointed to increasing protectionism in global trade since the 2008 financial crisis as a problem and Canada’s “resistance” to global economic trends such as urbanization.
“It's not going to get cheaper to live in a rural area in the long run… What's happening globally is urbanization — economic activity is increasingly concentrated in urban centres.”
“It's going to become more and more expensive to live in places like in Kelowna or Prince George, why? Because we're not going to build housing fast enough,” he continued.
Hickey suggested investors prefer to pour money into major centres like Vancouver, Montreal or Toronto.
“Capital is going to go to the places where they know there's going to be demand because people are moving there, because people want to be there. Because people are going there for high paying jobs,” he said. "That is where the talent is."
Kelowna is growing at a pace unmatched among cities in Canada, according to the 2021 census. Developers have taken notice and real estate investment trusts are gobbling up existing buildings.
“Kelowna is growing, that's great, if we can get out of our own way, that'll continue to happen,” Hickey said.
Hickey, however, admitted that in uncertain times like now "there's a lot more people looking into the crystal ball," and the recovery from the pandemic is impossible to confidently predict. While the worst of the economic impacts of COVID-19 appear to be in the rear-view mirror, he compared the pandemic's impact on the economy to dropping an anvil in a bathtub of water.
"There is going to be a lot of water that splashes around before things settle down."