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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