As we finally move out of our pandemic-riddled economy -- and into one characterized by climbing inflation and sky-high interest rates -- predictions are plenty.
Global accounting firm RSM Canada launched its second 2022 edition of The Real Economy: Canada, a quarterly report that provides Canadian businesses with economic analysis and insights into how the nation's middle market can navigate through complex economic and geopolitical conditions.
“With Canada playing a delicate economic balancing act between short-term growth and long-term stability, the second edition of this year's 'The Real Economy: Canada' report examines the uncertain financial terrain ahead for Canadian businesses despite the competitive advantages held by the energy and commodities sectors, and to what extent inflation will be an economic factor for the rest of 2022,” reads the report.
Ottawa, Canada, September 6, 2020; The English version of the sign on the Bank of Canada headquarters on Wellington Street
The report highlights how Canada stands to gain economically from swelling global agriculture demand resulting from geopolitical tensions, the greater role federal and provincial governments will need to play in the clean energy transition, and how Canadian companies are attempting to integrate Environmental, Social, and Governance (ESG) principles into their operations and financial reporting.
Overarchingly, the report found that Canada’s commodities and energy sector will drive economic recovery.
"Amid geopolitical tensions and surging inflation, the Canadian economy is well positioned to grow this year given its competitive advantages in the commodities and energy sectors," says Tu Nguyen, economist and ESG director with RSM Canada. "For this reason, a rate hike is a given in the Bank of Canada's next announcement in June, and a 50 basis-point increase would not be out of the question."
Here are some other findings...
Canada’s middle market is bracing for tighter economic conditions.
Not surprisingly, the report noted how the middle market will face tighter economic conditions. “An overheated Canadian economy and global inflationary pressure have the Bank of Canada committed to increasing short-term interest rates and shrinking the size of its balance sheet,” reads the report. According to RSM, Canadians can expect another rate hike in the Bank of Canada’s June announcement, though inflation will remain at 6% for the coming months before the effects of rising interest rates are felt.
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RSM forecasts that increased day-to-day costs and higher mortgage rates should dampen consumer spending and investment in the housing market, all of which should moderate growth and temper inflation. “Key indicators suggest that financial conditions are below normal, meaning a drag on the economy in the coming quarters is likely as the tendency to borrow or lend declines,” read the report.
Canada is in a position to satisfy swelling global agricultural commodity demand.
According to RSM, Canada is well-positioned to meet the global agricultural commodity demand that’s fuelled by Russia’s invasion of Ukraine. Canada produces many of the same agricultural products that are suddenly in short supply -- such as potash, grains, and cooking oils -- and could be in position to replace some of the lost exports on the global market, says RSM.
“Canadian agricultural commodity producers stand to benefit from higher prices given high demand and strained supply abroad, with European companies already looking to secure contracts with Canada suppliers,” reads the report. RSM highlights how Canada and the United States can alleviate global food insecurity caused by geopolitical disruptions if they can increase production and exports of essential commodities. An increase in production isn’t without its obstacles, highlights RSM. This includes the impact of higher North American labour and energy costs on commodity prices, and the impact of climate change on grain production.
"Russia's invasion of Ukraine has destabilized global food markets by disrupting production and trade flows, putting Canada -- as well as the United States -- in a position to replace some of the agricultural products currently in short supply,” says Nguyen. “North American businesses that produce agricultural commodities will need to look ahead and prepare accordingly, whether by increasing production or securing future contracts, as global food supplies are disrupted into next year."
Transition to clean energy and away from ballooning fuel costs will require greater government action.
Thanks to sky-high and rising fuel costs -- something triggered by rising carbon tax rates and Russia’s war against Ukraine -- demand for electric vehicles is outstripping supply, rising faster than demand for gas vehicles. Despite this, RSM highlights that Canadian oil consumption remains steady due to the lack of readily available fuel-efficient vehicles -- something that indicates that greater government investment and incentives are required to encourage a large-scale clean energy transition.
“Despite current fuel prices, the federal carbon tax can help Canadian consumers and businesses transition from fluctuating oil and gas prices toward a more sustainable economy based on renewable energy,’ reads the report. “Oil and gas have played a big role in Canada's recent inflation surge, with just the exclusion of energy dropping Canada's inflation number from 5.7% to 4.4%.”
Canadian companies appear committed to sustainability, yet are unsure of how best to put ESG into practice.
While ESG is becoming a more widely known concept, there remains some uncertainty as to how to best put it into practice. A 2021 RSM report showed a dramatic rise in middle market business executives who said they were familiar with ESG, increasing from 39% in the fourth quarter of 2019 to 69% in the third quarter of 2021. “However, the practice of how firms integrate ESG at an operational level, including into the investment decision-making process, is still in its infancy,” reads the report.
With that said, stakeholders are demanding that companies start to report on ESG factors in a much more structured way, says RSM. “Businesses that wish to be serious about ESG must understand at a quantitative level how they embed sustainability into their operations and how they have aligned their success to their stakeholders' success,” reads the report.
