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Supply chain disruption will hinder Canada's economic growth into 2022, new report shows

Christian Fernsby |
RSM Canada, a provider of audit, tax and consulting services focused on middle market businesses, launched its fall issue of "The Real Economy, Canada", a quarterly report that provides Canadian businesses with economic analysis and insights into factors driving growth, or economic headwinds, in Canada's middle market.

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ith the Delta variant continuing its spread across an already fragile global supply chain, the fourth edition of this year's 'The Real Economy: Canada' report examines what the global economy's depleted supply of goods will mean for Canada's long term growth, and what Canadian businesses should look out for as they try to prepare for the critical holiday season ahead.

Key findings in this quarter's report include:

• Supply chain disruptions have dimmed Canada's economic prospects

Increased globalization and the resurgent coronavirus have created another supply crisis, with Canadian businesses scrambling to locate alternative resources with the ramp up to the critical holiday season. Disruptions due to port closures, factory shutdowns, product halts and labour shortages will likely delay return of full production until mid 2022.

In addition, the property sector crisis in China, the showdown over the raising the debt ceiling in the United States, and disruptions to the global supply chain have all contributed to volatility in global financial conditions.

• Canadian businesses will face higher international shipping costs and depleted inventories for foreseeable future

Imports from China Canada's second biggest trading partner dropped 30.9 per cent to $3.9 billion in July, from the record high of $5.6 billion in March. The average price to ship a container from Asia Pacific which accounts for 68 per cent of all monthly shipping volume to North America increased by 63 per cent in the March July period, while the same cost from Europe increased by 79 per cent.

Many Canadian businesses have been forced to look for alternative domestic suppliers that can compete in terms of pricing. The lack of options may provide the federal government with the incentive to address interprovincial trade barriers.

• Shortages in the labour force will pose challenges for recovery

Declining labour force participation rates and labour shortages will become a more acute problem over the next year. There was a significant increase in job vacancies this year, from 550,000 in the first quarter of 2021 to 730,000 in the second quarter.

The positive impact of Quebec's child care program especially on women labour participation rates

uggest that a national program would be in the best interests of the Trudeau government. Greater numbers of women in the labour force could help address worker shortage issues that are threatening the recovery.

• Canada's professional services industry is facing a significant talent drain

Canadian law firms have been slow to react to the current exodus of talent to the United States' red hot lawyer labour market. The business and professional services industry had the third highest year over year job switching rate a whopping 22.84 per cent. This includes crossing the border for new positions.

Base salaries for entry level lawyers at top corporate firms in the U.S. have climbed to $200,000, while Canadian firms have not followed suit. Canadian law firms risk losing talent to firms on either side of the border given the growth and individuals' willingness to pursue higher wages with a new employer.

• However, there's potential for growth in Canada's green industries

The Trudeau government is expected to accelerate its climate change plan post election, further embracing an activist approach. The carbon tax coupled with government incentives is creating the foundation to encourage the development of green industries and projects countrywide.

"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" says Joe Brusuelas, chief economist with RSM US LLP.

"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.

Brusuelas continues: "Businesses should prepare for disruptions as they prepare for the critical holiday season. 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."

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