As supply chain disruptions continue, Canada's economy feels the pain

Unabating supply chain disruptions are threatening Canada’s economic recovery, according to RSM Canada’s quarterly The Real Economy report.

The Covid-19 delta variant and lagging vaccinations globally have driven continued rounds of port closures, factory shutdowns, production halts, and labor shortages. Interdependent global supply chains mean that Canadians and Canadian firms are facing supply shortages and higher prices across the board.

On the consumer end, the annual inflation rate hit 4.4% in Canada, its highest level in 18 years, as the cost of transport, housing, and food has jumped significantly.

On the business end, supply chain bottlenecks have constrained Canadian manufacturing and exports. As such, consumption, business investment, and government spending have been keeping Canada’s economic recovery afloat.

However, the property sector crisis in China and the debt ceiling showdown in the US, in addition to the supply chain crisis, are providing significant headwinds to Canadian and global growth. Economists polled by Bloomberg have slashed their forecast for Canada’s Q3 2021 growth from 9% to 4.5%.

As delta has spread, Canadian imports from Asia have faltered and transport costs have skyrocketed. Imports from China dropped 31% to $3.9 billion in July, down from a record $5.6 billion in March. The average price to ship a container from Asia-Pacific jumped 63% in the March-to-July period, while the same cost from Europe increased by 79%.

RSM’s economists say the mismatch in supply and demand – and consequent price volatility – is not a permanent condition. In the near-term, however, there is no avoiding supply chain constraints, and companies relying on imports will have to deal with high transport costs and depleted inventories for at least another eight months.

“The global supply chain is already in a very fragile place and further disruption is going to delay the return of full production within the Canadian economy until the middle of 2022," said Joe Brusuelas, chief economist, RSM US. "This would create conditions for further price volatility, at least until hesitations over the delta variant eases, and businesses should be prepared for prices to potentially increase further.”

In the near term, Canadian firms can look to alternative solutions to benefit from strong consumption demand, according to RSM. One avenue is domestic suppliers, which may now be better able to compete on pricing with imports from Asia. Another avenue is dynamic pricing strategies that leverage automation and data analytics to change pricing quickly in response to fluctuating supply and demand.

"Businesses should prepare for disruptions as they prepare for the critical holiday season,” Brusuelas added. “Finding alternative domestic suppliers and adopting dynamic pricing strategies will present firms embedded in the real economy with the best approaches to contend with rising prices and the shifting composition of supply and demand."