Inflation continues to be a hot topic, as many Canadian families struggle to meet their household budget. Although central banks continued to raise policy interest rates, inflation remains persistently stubborn. There will likely be lots written about the impact of historically rapid interest rate increases and the unintended consequences, which are sure to follow.
Data Highlights
Alberta’s growth forecast for 2023 and 2024 is 2.4% and 2.2% respectively. Energy and agriculture production, combined with record migration, will help offset the impacts of rising interest rates. Although wildfires slowed energy production and depressed consumer confidence, oil prices remain strong and the Businesses Barometer Index’s long and short-term outlook remained positive (see graph to the right). The price gap between WTI-WCS is also narrowing which is good news for Alberta oil producers and the economy.
Oil and gas capital spending is expected to increase by 10% in 2023 and 8% in 2024, although not to the historical levels of the past. Renewable energy continued to expand and carbon capture and storage presented new opportunities for continued economic growth.
On the Horizon
The impact of rapidly increasing rates, aimed at lowering inflation, has made the cost of home ownership and business capital expansion more expensive. The mortgage cost portion of the Consumer Price Index has increased by 30 per cent as consumers and businesses expect goods and services prices to continue to increase. Furthermore, workers are pressuring employers to raise wages either through collective bargaining agreements or labour market shortages.
The Alberta Government reported that as of April, average weekly earnings were up by 3% from a year ago and 1.1% month over month – this trend may continue which will put more upward pressure on inflation. The Bank of Canada (BOC) indicated that it’s unlikely that inflation will return to the 2% target by the end of 2023. It’s entirely possible that we may be in for another rate increase before the year is over.
Looking Forward
While the BOC expected economic growth to slide in the first part of this year, responding to rising interest rates, it actually rebounded to 3.1% in the first quarter of 2023. The increase in consumption was partially driven by a surge in immigration. Immigration levels for 2024 and 2025 are expected to be similar. Supply chain issues and employment continued to improve, which also supported consumption and increased inflation.
In advanced economies across the globe, more baby boomers are retiring, withdrawing from the labour force, spending more and saving less. This drastic demographic change will result in a shortage of skilled and experienced labour, impact productivity and upset the global balance of savings and investment. What does this mean for your business going forward?
Three key components will help ensure that your business has a solid foundation in which to navigate the volatile and unpredictable economic future:
Labour: Attract and retain quality skilled workers. Paying more for better-trained, experienced and ambitious employees will actually cost you less in the long run.
Competitiveness: Look for opportunities to reduce your fixed overhead, lower your operational costs and improve your productivity, reduce or eliminate non-value-added activities, and provide your customers with service and an experience that exceeds your competition.
Investment: Invest in labour, equipment and technology to improve your productivity and profitability. Stay ahead of technology!
While no one can predict with any certainty where inflation, interest rates, financial markets and the economy will be over the next year or two, one thing is certain: we will adjust, we always do. How well we are prepared for any shock or opportunity will determine how we land!