From supply chain issues to inflation, new economic risks loom for your business

Business owners are an optimistic lot. They take extraordinary risks to conceive, build and grow their companies. They don’t take ‘no’ for an answer. They persevere even when the odds tower against them. Yet even the most tenacious entrepreneurs can see the economic risks ahead—and it’s putting a damper on their post-pandemic recovery plans.

The good news is that employment has recovered to pre-pandemic levels, dipping to 6.9 per cent in September, according to Statistics Canada. COVID-19 social distancing restrictions are being lifted. Ottawa sees green shoots across the economy and feels confident enough to allow various relief benefits to expire. Business owners can see the light at the end of the coronavirus tunnel. But on the other side are an array of new challenges that might have been hard to predict just a year ago.

In many ways, these challenges—several of which can be tied directly to pandemic-related economic ripple effects—could present longer-term systemic threats that will be difficult to confront and overcome as companies seek new paths to growth.

Winter is coming and the risks are mounting in these four areas:

China’s economy

The world’s economic growth engine needs a tune up. Some analysts are warning of a potential stagflation scenario. Indeed, China’s consumer price index skyrocketed by 10.7 per cent in September, just as GDP growth remained sluggish at 4.9 per cent. Whether stagflation predictions play out remains to be seen, but a slower-growing China and weakened demand is a major problem for economies around the world. Worse, rising coal prices and resulting electricity rationing and rolling blackouts in the country’s manufacturing heartland could further hamper industrial output. And the potential for financial contagion looms large as the Evergrande situation has yet to be resolved.

Even for Canadian companies that don’t have direct ties to China, the world’s manufacturing powerhouse needs to keep churning out product to keep the global supply chain filled. If your supply chain does have direct exposure, pre-emptively negotiate with your suppliers in China to fix prices now, and be sure to pass on any increased costs to your customers if possible, potentially by renegotiating contracts and even adding price-adjustment clauses to preserve your profit margins. China’s economy will surely bounce back, but when—and how much damage is caused before that happens—remains to be seen.

Wage and price inflation

Despite prior reassurances, inflation may be more than a momentary side-effect of the COVID-19 crisis. The Bank of Canada is now cautioning that inflation could remain a more persistent problem than first thought, and forecasts an inflation rate of 4.75 per cent this year and 3.4 per cent next before a return to its 2 per cent target in 2023.

A new survey by the Canadian Federation of Independent Business finds that small to medium-sized companies plan to increase their prices by an average of 3.9 per cent this year, and 27 per cent of businesses surveyed felt a price hike of 6 per cent or more for their products and services could be in the cards. On average, they predict a 2.5 per cent increase in wages over the next year.

Wage and price uncertainty is financial kryptonite to business owners. The inability to accurately forecast expenditures can paralyze decision-making. Our best advice: work with your Chartered Professional Accountant/CFO/business consultant to develop a proactive strategy to manage and adapt to inflationary pressures. And don’t delay. Work through a range of scenarios and prepare for higher-than-normal inflation to last for at least a year—possibly longer.

Labour shortages

Canada’s economy is beginning to roar back to life, but businesses are encountering an unforeseen obstacle to renewed growth: they can’t find workers. There are many hypotheses to explain gaping job vacancies in some sectors, but the bottom line is that companies that can’t fill positions, can’t grow. No sector is immune, but some are facing more daunting labour problems than others. The job vacancy rate in the accommodation and food services sector hit 12.7 per cent in June, for example, while it hovers at 6.1 per cent across the construction industry and 6.2 per cent in agriculture and forestry. Even industries such as retail, manufacturing and finance report 4 to 5 per cent of their positions being unfilled.

We’ve heard from countless business owners who share the same complaint: it’s impossible to find talent, especially in sectors such as professional services, health care or technology, where competition for professionals is stiff at the best of times. Organizations should act now to alleviate labour shortages if they predict more robust organization growth on the horizon. As my colleague George Grignano noted in a recent blog, your best investment could be employee retention.

Supply chain instability

From high-tech microchips to automotive parts, it’s difficult to produce products if you can’t access the necessary inputs. Fully 31 per cent of respondents to the CFIB survey said their ability to boost production or increase sales was being hampered by a lack of products and materials. A stunning 36 per cent said their suppliers were having trouble filling orders. Supply chain challenges are only poised to get worse if factors such as China’s lackluster growth and productivity and unusually-high job vacancies don’t rebound.

Remember that preparation and caution will largely dictate your organization’s success or failure in the months ahead. Pay close attention to key performance indicators across your business and be ready to act to address supply or labour shortcomings.

The risks ahead are manageable, but they could make this an especially harsh winter for business leaders.

Jenny Lian, Partner

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