Two years of constant change due to the global pandemic have put us all into a state of uncertainty. For every economic indicator that seems to show positive signs and recovery, there are others showing the opposite. In the face of this, how do we, as business owners, move forward and build our plans for the future. In order to assess that let us first look at what is causing the uncertainty.
The Pandemic and Associated Restrictions
Last year wasn’t easy for Canadian entrepreneurs. The restrictions imposed to deal with the pandemic have tested the resilience of business owners in extraordinary ways. It’s likely the pandemic will once again dictate the path the economy takes this year. As we’re seeing with the Omicron variant, Canada remains vulnerable to new waves of COVID-19 infections despite the country’s enviable vaccination rate. Distancing, masks and limitations on the size of gatherings should remain in effect to counter the virus’s spread this year.
Several countries have reached new records of cases due to the latest variant, forcing authorities to tighten health restrictions. In Canada, the largest provinces reinstated drastic measures such as complete business closures. Although the isolation period has been cut in half for most Canadians, this other round of lockdowns could once again slow the economy early in the year.
Yet there are positive signs, as other countries, and several Canadian provinces have shown a willingness to begin to live with the reality that Covid-19 will be with us long term and we need to learn to live with it. There is hope that this will lead to an end to lockdowns and restrictions and a slow return to normal life in 2022.
Pressure on Supply Chains
Many companies have encountered supply problems since the economy reopened and, unfortunately, we don’t foresee these challenges going away anytime soon. These issues have been driven both by the pandemic and by complex geopolitics leading to tariffs and Buy Local campaigns.
The good news is the recovery has begun in earnest, creating a high demand for goods. In order to respond to the tsunami of orders, factories have accelerated production, which has resulted in high demand for transportation to move raw and intermediate materials. Meanwhile, finished goods continued to pile up in warehouses and ports due to a lack of containers and personnel to handle cargo.
The logistics problems have grown to the point where it will take months, if not years, to resolve them. Bottlenecks have affected industries throughout the production chain with significant multipliers and international spillover effects. Shortages will be most acute for hard-to-substitute products.
The emergence of the Omicron variant threatens to exacerbate the problems. China still maintains a zero-tolerance policy for outbreaks, which could close factories or ports. In Europe, the number of cases is increasing and several countries, notably Germany, could quickly reimpose severe lockdowns. Each disruption creates disproportionate spillover effects across different parts of the production chain.
We believe the current bout of inflation comes from transitory effects albeit will last longer than initially expected. Price growth will not reach the double-digit levels of the 1970s but will remain above 3% in 2022—especially in the first half of the year. Inflation should moderate as supply/demand imbalances are resolved and the Bank of Canada takes action later this year.
These conditions likely mean an acceptance that higher prices due to logistical issues are likely required, but given the global nature of the issues, these higher prices should not erode competitive situations and allow margins to be maintained.
Interest Rate Increases
In order to counter rising inflation, the Bank of Canada is expected to announce its first rate hike in the first half of 2022.
Rate increases are likely to be gradual and the Bank of Canada is expected to be cautious given the high level of debt in the economy. Households and governments are stretched and more vulnerable to rate hikes than in the past.
As a result, the first hikes should be effective in slowing demand. Monetary policy could therefore have the desired effect more quickly than we were used to before. On the other hand, the planned rate hikes could lead to a further boost in housing demand and investment in the early months of the new year as households and businesses take action ahead of the increases.
As a result, it’s likely that the interest rate changes will not necessarily slow the housing market or drive down inflation, requiring the use of a different strategy. So, while there may be some small increase in borrowing rates it will likely stay small.
So as the recovery from the pandemic continues, we expect most of the key factors impacting business owners to stay as they are today. While interest rates may increase somewhat, there will still be low-cost borrowing options to ensure that businesses can get the funding necessary to stay capitalized and continue to grow their business. Shipping will begin to open up, creating opportunities for companies to bring down costs and find new clients, potentially even growing their existing markets to take advantage of the competition that is not able to move as quickly. In conclusion, if you are careful not to overextend yourself then there will be opportunities to grow your business and speed your recovery so ensure you have the liquidity to take advantage when the opportunity presents itself.