Russian invasion hikes cost of business, but impact on firms’ sales ‘ambiguous’: Bank of Canada

A record number of businesses feel they will have some or significant difficulty in meeting unexpected increases in demand, caused mainly by labour “bottlenecks” and supply chain challenges, according to a new Bank of Canada report.

Shared yesterday, the central bank’s 2022 business outlook survey takes stock of the first quarter of the year, which has been dominated by Ottawa’s response to the Russian invasion of Ukraine.

While four-in-five business told the bank they are anticipating a hard time weathering the storm, one-third signalled that capacity limits are holding back their sales expectations, with most dealing with supply chain issues by pivoting to new suppliers or transportation providers, lowering their inventory or delaying orders and hiking prices — the latter of which signals they intend to pass on “conflict-related cost increases” to customers.

But the bank notes while the Ukraine file is “clearly expected” to boost the cost of doing business, the impact on their sales and investment plans “is more ambiguous,” as some businesses like those in the energy and other commodities space are anticipating higher sales because of increased demand. Other groups are projecting lower sales because of “increased uncertainty,” with some reporting that the “lingering” effects of Covid, like added cost pressures, have been “intensified” by the invasion.

According to data collected by the bank, through interviews for the survey conducted before the invasion, businesses were asked to rate their firm’s ability to meet unexpected hikes in demand or sales.

A record-high 30 per cent reported they are expecting significant difficulty, a figure that sat at two per cent in the early days of the pandemic during the second quarter of 2020, but jumped to 20 per cent within a year. Since then, it’s steadily increased each quarter.

Fifty-one per cent reported they’d have some difficulty, just shy of the 52 per cent that responded similarly back in the second quarter of 2000. Since the pandemic, the number has mostly risen from 25 per cent.

Challenges to supply chains are a matter being probed by the transportation committee, which heard from several industry groups involved in the sector yesterday.

Chemistry Industry Association of Canada CEO Bob Masterson told MPs his sector ships 550 rail cars each day, but there is a growing recognition of a need to beef up the country’s transportation infrastructure to facilitate the movement of goods and services.

Sharing some stats of his own, he said a poll of the group’s members shows 76 per cent reported having their operations “negatively impacted” by supply chain issues over the last two years, with 52 per cent reporting they’ve lost sales both at home and abroad because of “disruptions in the rail transportation service.”

In some cases, those have been “severe” and hit operators on “nearly an annual basis” over the last decade, said Masterson, pointing to examples like work stoppages, blockades and lockouts or strikes. He said even hints of potential disruptions force officials to be proactive in taking stock of possible impacts.

“In an industry like ours, you will be blockaded, not allowed to ship, embargoed — you can’t even put the cars on the rails if we think a strike or lockout is coming, because some of these goods are dangerous and can’t just sit on a siding somewhere,” he explained. Even once a disruption has been resolved, it can take “weeks to return the system to normal fluidity,” which results in lost sales for those anticipating shipments and tarnishes the country’s reputation as a “reliable supplier.”

The “most important recommendation” he issued to the committee is to look at ensuring how rail labour disputes can be avoided, noting his industry loses some $532 million in sales each week of a disruption.

Conservative MP Marilyn Gladu picked up that thread, pressing whether rail services should be deemed essential, to which Masterson agreed.

Similar calls came last month from Saskatchewan Premier Scott Moe, after Canadian Pacific Railway workers threatened to strike in March. Moe said the feds should pass back-to-work legislation, though the government repeatedly said it has “faith” in the collective bargaining process.

Days later, the company and Teamsters Canada Rail Conference agreed to binding arbitration to end the stoppage.

Some unions were happy recently after seeing that the NDP-Liberal confidence-and-supply agreement vows to introduce a new law by 2023 that bans unionized workplaces from using replacement workers if their workforce is striking.

It’s been hailed by the NDP as a “huge win” and “major” piece in inking the deal, though Labour Minister Seamus O’Regan, whose mandate letter orders him to bring in legislation that would “prohibit” their use when an employer has locked out its workers, said the move is thanks to “ongoing” talks with “stakeholders.”