Dollars & Sense – Making Sense of the Madness

By Angela Altass

We have become very familiar with these words in recent years: COVID, pandemic, and inflation, to name a few. Worker shortages, supply chain, and hybrid offices are examples of things we didn’t spend as much time thinking about before the pandemic. Sometimes it seems that the world is topsy turvy and life can feel overwhelming.

“We have to make sense of this madness,” commented Benjamin Tal, managing director and deputy chief economist, CIBC, when speaking recently at the Coffee Association of Canada’s 2022 The Road Ahead conference in Toronto.

Inflation was a key topic of the financial forum session at the conference and Tal noted that inflation is everywhere. Inflation is the rate of increase in prices over a given period of time. The Bank of Canada adjusts its key policy interest rate in response to inflation. The Bank of Canada recently raised its benchmark interest rate to 4.25 per cent.

Tal reminded conference attendees that there is a cost to bringing inflation down.

“The Bank of Canada does not care about inflation today,” said Tal. “Inflation tells you about the past and it’s the inflation expectations for tomorrow they’re fighting.”

Supply chain is a big source of inflation, said Tal.

“Everyone is talking about supply chain but nobody knows what it is,” he said. “To put the supply chain story in perspective, we squeezed four years of consumption into one year. That’s crazy! Even a normally functioning supply system would have difficulties dealing with this demand and what we have today is not a normally functioning supply system. The Bank of Canada can talk about inflation until they are blue in the face but if the inflation is coming from the supply chain, from China or Russia, there is nothing they can do about it. But, if it’s domestic they can do something about it.”

The Bank of Canada will continue to raise interest rates, said Tal.

“When they cut interest rates, which will be a 2024 story, they will cut it by less than before,” he said.

If the COVID pandemic was taken out of the equation, the supply chain issue would disappear, says Tal.

“I believe that 80 per cent of the demand story was about COVID and 90 per cent of the supply story was COVID,” said Tal. “We know this is not going to disappear tomorrow but we also know that we are in a transition from a pandemic to an endemic. This winter will be long and this has major implications for your business.”

The supply chain situation is improving, noted Tal.

“It’s almost back to normal,” he said. “Things are moving in the right direction, which is very important. Things are starting to improve. It’s not there yet but it will be.”

A big story since the start of the pandemic has been labour shortages.

“We need to understand what is happening with the labour market,” said Tal. “We cannot find people. Businesses are paying people to come in for an interview. So, where are they? Some people say they are all at home watching Netflix, but no, they are not. After two-and-a-half years, people have moved on and are in totally different industries doing different things. Eventually businesses will find people but it will take longer as people have been moving from one industry to another in record time.”

Most of the people who lost their jobs during COVID had low-paying jobs, said Tal.

“We have people retiring and we have a situation in which the people who are retiring are low wage, low education,” said Tal. “So, more people are leaving low wage and low education jobs while all of the people entering the workforce are university educated individuals. The people entering the labour market are high education, high wage and the people exiting are low education, low wage.”

Immigration is also a big part of this labour story, stated Tal.

“Seventy per cent of the new immigrants to Canada in 2021 arrived from one country and that country is Canada,” said Tal. “They were already here as students. Their visas expired and they applied to become permanent residents. They are younger and they are more educated. They speak the language and they have work experience. They enter the labour market at higher wages.”

Businesses and corporations have to focus on profitability, said Tal.

“Wages are starting to rise, including low wage jobs, and this is a challenge for companies,” he said. “Profitability is facing downwards pressure. You have two choices: Increase wages or invest in innovation to replace labour.”

The people whose jobs were still there during the pandemic got the benefit of a recession without the cost of a recession, said Tal.

“We have never seen anything like that before,” he said. “Interest rates were so low. There was a sense of urgency so we borrowed activity from the future and the future has arrived. The real estate market is now slowing down with higher interest rates and that’s a good thing. The market will continue to go down over the next six months because it’s necessary.”

Speaking at the same session, Dimitri Mazur, senior manager, restaurant finance, Canadian Western Bank (CWB), said that the next eight to 12 months will be very telling as to what happens with many businesses.

“Our business focuses on lending to the hospitality industry and it’s not just an interest rate issue, it’s also qualifying for that debt,” said Mazur. “If you are a restaurant or a coffee shop the volume of your sales may have come back but now you’re dealing with the increased cost of goods, increased cost of labour, increased rent and you’re really having your bottom line squeezed from a 10-20 per cent to two or seven per cent. That affects your ability to get money.”

There will be a lot of opportunities for bigger consolidators to get discounted opportunities with people trying to exit businesses and get out while they can, said Mazur.

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