Increased globalization and the resurgent coronavirus are wreaking havoc on an already fragile global supply chain, revealing labour and wage shortages and raising concerns that inflation will run hotter for longer, new research finds.
The latest quarterly report from RSM Canada said supply chain disruptions have dimmed Canada’s economic growth prospects into 2022. Canadian companies will face higher international shipping costs and depleted inventories for the foreseeable future.
According to the report, the average price to ship a container from Asia Pacific — which accounts for more than two-thirds (68%) of monthly shipping volume to North America — increased by 63% from March to July, while the same cost from Europe jumped 79%.
As a result, Canadian businesses are scrambling to find alternative domestic suppliers that can compete in terms of pricing, especially as the holiday season approaches, the report said.
“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 with RSM US LLP, in a statement.
“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.”
The report predicts labour shortages and declining labour force participation will become a more severe problem over the next year, posing challenges to Canada’s recovery.
A report from Richardson Wealth said Canada’s labour force participation had already been declining since its peak in 2000, and has barely recovered from the pandemic hit.
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 pandemic caused some jobs to disappear for over a year, causing the government to step in and provide enhanced benefits. As service jobs return and demand normalizes, the report said, benefits are fading.
“Given these gyrations, is it any wonder distortions in the labour market are causing wage pressures?” the Richardson Wealth report said.
Wages aren’t a consumer price index category but they “feed into the cost structure of so many categories and can be a material contributor to more widespread inflation,” the report said.
“Investors in individual equities may want to dig a little deeper to ascertain their portfolios’ sensitivity to higher wages and reduce in case these pressures continue to build,” the authors wrote.
Investors should also consider their portfolio duration, as long bonds and growth businesses with high valuations dependent on future revenues will fare poorly in an inflationary environment, the report said.