The Canadian Economy Suffers Setbacks As Cases Rise And Inventories Fall: BMO

The Canadian economy suffered some setbacks last month, but they’re likely to resolve. BMO‘s Canadian Business Activity Index (BAI) advanced in July, showing an improving environment. Erik Johnson, one of the bank’s economists, said the growth was much smaller than a month before though. This may appear concerning at first, but the bank believes this issue will resolve soon.

Canadian Business Activity Growth Is Slowing

The BAI shows Canadian activity is still growing, but losing steam already. The index increased 0.6% in July, which the bank highlights is less than half of the 1.3% seen the month before. Growing is a good start, slowing this early in the recovery can be a concerning sight. Johnson attributes this to two factors — falling inventories and rising concerns over the Delta variant. 

The Slowdown Is Largely Due To Low Business Inventories

That’s right, low inventory isn’t just an issue with real estate these days, but all businesses as well. Pandemic restrictions and shipping bottlenecks mean less stuff to sell. If you can’t sell things, people can’t buy them. Naturally, that would lead to a reduction in business activity, slowing the recovery. It’s not great, but it’s also not terrible.

The bank cites housing as a big contributor to the slowdown of the index. They do acknowledge home sales are still elevated from historic levels. StatCan estimates declines in manufacturing (-1.2%), wholesale activity (-2%), and retail (-1.7%). Auto sales were also a big one, with manufacturing still catching up from its backlog. “Despite rising on a seasonally adjusted basis in July, auto production hasn’t sped up enough to see inventories recover sufficiently to meet demand,” he said. 

The Delta Variant Is A Concern, But Canada Is Well Positioned To Handle It

The second issue is the rate of the economy’s reopening has also slowed, as Delta variant concerns rise. Ontario recently announced the current health restrictions would be indefinite. Having the country’s largest province slow its reopening tends to slow recovery across the board.

In general, rising cases are a concern, but Canada’s high vaccination rates are likely to limit the pain. More than 75% of the country has been double vaccinated, making it one of the highest rates in the world. “This will help limit the severe health and economic risks posed by the Delta variant,” he said. 

Canada’s business recovery is slowing, but the reasons behind it appear to be transitory. Once the bottlenecks clear, business inventories are likely to bounce back. The high vaccination rate should also ease the impact of a potential outbreak. Expect some near-term volatility until these issues clear in the not-so-distant future.

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  • Karen Tranh 3 years ago

    Life is transitory. It doesn’t mean it’ll end tomorrow. Same with inflation. It’ll subside and possibly even turn into a deflationary risk. That doesn’t mean it won’t suck up your buying power today when you need something.

  • Omar 3 years ago

    What I don’t get is if we’re 75% vaccinated, why is the economy not making more progress on reopening? The new variant is too dangerous, for the old vaccine, so now we’re waiting on booster shots… that will come when another variant does? At some point you have to acknowledge risk exists. Wear a mask and get vaccinated.

    • Trader Jim 3 years ago

      I think once kids can get vaccinated, they start accepting a little more risk. Should be just a few more months.

    • Paul 3 years ago

      Because as this site has pointed out time and again money is being poured hand over fist into a non-productive asset.

    • J 3 years ago

      Why wear a seatbelt when you can still total your car and die? Silly?
      Because it can still significantly improve the outcome in most cases.

    • Jojo 3 years ago

      It significantly lowers your chances of dying from and spreading covid. That’s a pretty good reason. How do people still not realize this?

  • Trader Jim 3 years ago

    The inventory narrative is somewhat BS. Commodity prices are coming down (and home prices), but it’s due to a lack of buyers? Say what? That’s not how economics work, and the banks know that.

    • Anthony 3 years ago

      I work for a company that acts a vendor/supplier to the hospitality industry (yikes right?), I can say anecdotally that our open order book is very healthy at this time; even when assessing against 2019’s sales figures. However, over 65% of our open order book is on backorder with the balance being on hand inventory ready to go. Our factory suppliers from overseas are behind, supply chain/freight issues are abundant.

      The bottleneck is the inventory in combination with a lack of available market due to restrictions. It’s great that Canada is positioned so well to fend off the variants 4th/5th wave… but are the 3rd world countries we import our products from in the same position? I echo the sentiment in the article: can’t sell what you don’t have.

  • D 3 years ago

    70% of the population is vaccinated and yet the there isn’t a 70% [percentage point] decline in cases. The vaccines don’t work. The economy should be fully opened and we should forget about the 99% survival rate virus.

  • Sean Robinson 3 years ago

    REMEMBER….everything bad happened to Canada under LIBERAL LEADERSHIP…and under the fake socialist banner. Who signed the NAFTA deal….SOME WHACK JOB name Paul Martin

  • Bob Walter 3 years ago

    On business growth: half of the country is planning to keep the other ~ half out of their business due to vaccination status so what do the businesses expect? Eliminating half of your customers is always a good idea.

    • Bkl 3 years ago

      I don’t know, 75% vaccination rate is not half…… Besides, those to refuse to vaccinate are usually the less educated and less affluent.

      • Bob Walter 3 years ago

        I should have been more clear in my point that it is harmful for the economy at least that the Government is telling businesses to ban a large part of the population based on their health status, so how well do they exactly think this is going to be a tailwind for business.

        Where do you get your source for less affluent and less educated? It seems like a repetition of something that the Toronto Star would write.

      • Dar Robbins 3 years ago

        BS, The people who have yet to be vaccinated know that the vaccine is still experimental, have been rushed into production and the manufacturers have been immunized from legal prosecution.
        I’ll take the vaccine once the manufacturers are allowed to be sued for misrepresentations and health damage.
        Don’t drink the cool aid.

    • Paul 3 years ago

      75% is not half. Anti-vaxxers do not make up 50%. Though that is the type of math I’d expect from them.

  • Flipg 3 years ago

    Covid itself is not that big a problem.

    Roughly 166,000 Canadians died from various cancers in the last 2 years.
    Roughly 80,000 Canadians died from medical malpractices in the last 2 years.
    Roughly 74,000 Canadians died in the last 2 years from cardiovascular diseases.
    Roughly 26,000 Canadians died from covid.

    It’s hard to estimate how many Canadians died from political malpractice in the last 2 years.

    The handling of the epidemic, the destruction of our economy and way of life…, is the problem.

    Overpaid Public Sector workers labelled 20% of Canadians as “non-essential workers.” What did they expect to happen?

    • david 3 years ago

      You hit a nerve. In broader perspective we are likely doing way more bad than good by not reopening fully. We got 26K deaths last 18 months and wont see as much next 18. If you add up other causes of deaths, it is not much.

      But the absolute priorities are to pretend health care system is not outdated, and to not show to a big part of the voters (the boomers) that politicians are giving up on them. For these reasons they are ready to screw the younger generation big time. They will have time to come up with excuses.

  • JCH 3 years ago

    Voters: demand that your Canadian politicians #LetHomePricesFall !!

  • Sharon Sommerville 3 years ago

    Having been around and opposed to the Cdn/US Bilateral Agreement, I remember very well who signed what. The Cdn/US Bilateral Agreement, the precursor to NFTA, was negotiated and signed by Mulroney. The 1988 federal election was fought on the agreement. Mulroney won and so began the slow and painful demise of Cdn. manufacturing. NFTA was was negotiated & signed by Mulroney in 1992. It came into effect in 1994 when Chretien was P.M. The Liberals didn’t have much to do with it.

  • Adil Rahman 3 years ago

    Due to the coronavirus, a lot of businesses raise down in the whole world, not only in Canada. On the other side, a part of Canadians is out of vaccines. So the economic situation for this time is natural I think.

    • Lou 3 years ago

      haha. Very funny, but adjust GDP for excess credit growth. Canada didn’t prop up small business, it just got more people to buy homes and gave massive handouts to big business. It replaced small businesses with an increase in share to big businesses.

      This wasn’t a recovery. It was a hostile takeover, and morons are happy they got $2k out of it.

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