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BREXIT FALLOUT

BREXIT FALLOUT

CANADA FIRST?

Global supply chains rose in prominence along with the COVID-19 pandemic last year, an interest that shows little sign of slowing. On February 24, US President Joe Biden signed an executive order to boost manufacturing jobs and strengthen US supply chains for batteries, pharmaceuticals, critical minerals and semi-conductors. Aside from a supply chain issue, the US sees this as a national security issue and economic risk. The country has grown increasingly reliant on imports of many of these goods, and Biden wants a 100-day review, along with the possibility of increased domestic production.

There’s a case for such interest. Many countries, Canada included, were caught flatfooted by the pandemic kicked in March 2020. Many scrambled to procure enough PPE to manage the new demand. We’re seeing similar global demand challenges now with the vaccine rollout.

An ongoing semiconductor shortage precipitated by the pandemic affects everything from mobile phones to electric cars to 5G communications and mobile devices. No wonder the US administration would like to manufacture more of their own.

Luckily, Canada is making moves to strengthen its manufacturing and supply chains, as well as boosting innovation. In early March, the Federal Economic Development Agency for Southern Ontario (FedDev Ontario) announced $4.7 million to expand Canada’s first hardware and semiconductor-focused lab, ventureLAB’s Hardware Catalyst Initiative. Those in the program can access technical resources, manufacturing capacity, investment expertise and talent networks.

In another example, Next Generation Manufacturing Canada (NGen), the industry-led organization behind Canada’s Advanced Manufacturing Supercluster, recently announced over $27 million for winners of its Strategic Supply Challenge. The competition saw companies use advanced manufacturing technologies to build a sustainable, madein-Canada supply of critical products.

The projects aren’t designed to address the pandemic only, said Jayson Myers, CEO of NGen: “They are investments in advanced manufacturing processes and technologies that will help meet the immediate needs created by COVID-19, while also developing a sustainable, globally competitive and cost-effective domestic supply that can be applied to industry needs beyond the pandemic.”

There is an appetite for more homegrown solutions. A recent KPMG Canada survey of over 2,000 Canadians found that most wanted a “Canada-first” mindset to jumpstart the economy after the pandemic subsides. The survey found that 92 per cent want government to create incentives to “buy Canadian” and ensure we build domestic capacity to supply critical needs. As well, 86 per cent want corporate Canada to allocate a share of contracts to Canadian SMEs.

Catastrophes like pandemics can accelerate innovation. Hopefully, Canada continues to support opportunities to build a more innovative and dynamic supply chain and manufacturing base.

EDITOR MICHAEL POWER 416-441-2085 ext 110, michael@supplypro.ca

PUBLISHER ALEX PAPANOU 416-441-2085 ext 101, alex@supplypro.ca

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EDITORIAL ADVISORY BOARD LORI BENSON Procurement Compliance, L&D, Engagement and Knowledge Lead | Business Enablement, Ernst & Young LLP THOMAS HUDEL Manager, Purchasing and AP, Esri Canada Ltd. WAEL SAFWAT Procurement Director, Black & McDonald SHERRY MARSHALL Senior Manager, Meetings, Travel & Card Service, PwC Management Services KIRUBA SANKAR Director, Program Support, Purchasing and Materials Management—City of Toronto JEFF RUSSELL Corporate Purchasing Manager & Inventory Manager, Miller Waste Systems Inc.

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HALF EMPTY OR HALF FULL

WILL STAGFLATION BE COVID-19’S LEGACY?

It has been almost one year since the global economy hit the brakes in the wake of the COVID-19 crisis. The amount of fiscal stimulus in all of the developed countries of the world has been both astonishing and unprecedented. One year ago, the net provincial and federal debt in Canada was roughly 65 per cent of the Canadian economy. By the end of the current fiscal year (March 31) it is estimated that it will exceed 90 per cent. Trust me, next year it will be well north of 100 per cent.

Arguably, the situation is even more dire in the US. In 2019, leading up to the outbreak of COVID-19, the US deficit was $1 trillion. This year it will exceed $3 trillion. There are 330 million Americans. That means that in the past year, every single person was given $6,000 in excess of what was collected in taxes. Debt to GDP stands at 136 per cent and my guess is that this will exceed 150 per cent at this time next year. Lots of money has been printed and the issue many economists are debating is whether this will lead to inflation in the near future.

Here’s the argument why inflation is nothing to worry about. In a developed economy, such as we have in North America, the most important cost input is wages. Both unemployment and, maybe as important, underemployment are high, which means that as the economy picks up, businesses will be able to attract workers without raising wages. In fact, if this thesis is true, there’s every reason to suggest that wages may actually fall in the near future, which is anti-inflationary. This is the argument why the glass is half full and there is no reason to be concerned.

Here’s the argument why inflation is something to worry about. As Milton Friedman noted, inflation is always a monetary phenomenon. Too many dollars chasing too few goods. How can you give each person $6,000 for doing nothing and not expect that prices will be bid up? In fact, my argument is that we have seen significant inflation in the past 12 months. Don’t believe me? Look at housing prices. With the economy at a standstill, prices on average went up 23 per cent year-over-year across Canada. The stock market tells a similar story. And don’t get me started about Bitcoin.

Therefore, we have seen asset inflation in the past 12 months where we haven’t seen similar increases, at least according to the consumer price index (CPI), in the goods and services we routinely buy. The latest reading is that prices are up one per cent year-over-year. The food category was supposed to be in line which is why I’m suspicious of the CPI. I’ve done much more grocery shopping in the past year than I had since I was married five years ago. Staples like bacon, eggs, and ground beef are significantly more expensive than they were a year ago. (This is something I’m going to track and will be the subject of the next column).

I’m in the glass half empty camp. There will be inflationary pressures and sooner than most people think. I don’t think there will be runaway inflation. Rather, I think that the more likely scenario is stagflation, a combination of underemployment combined with inflation slightly higher than the target of two per cent traditionally set by the Bank of Canada. What most economists are missing is that life is going to be getting much more expensive in a variety of ways not captured by the CPI.

But before I address inflation, I’m going to talk about the much more serious problem, and that is the underemployment not captured by the unemployment rate which currently exceeds nine per cent. The participation rate in Canada is 65 per cent. If the economy were healthy, it would be 70 per cent. This means that unemployment is really closer to 14 per cent and even that understates the magnitude of the problem. We are warehousing young people in college and university at an unprecedented rate and a distressing number of them are enrolled in programs that offer no hope of meaningful employment after graduation.

Back to inflation. Here’s what it’s going to look like over the next several years. All sorts of taxes and user fees are headed higher. My guess is that property taxes in Toronto will appreciate at an annualized rate of six per cent, compounded annually over the long run. That means you’ll be paying twice as much 12 years from now. Income taxes are going to be much higher, particularly for those in the upper brackets. And a variety of “hidden” user fees will go up as well. None of these are captured in the CPI and all of them will contribute to an extended era of stagflation which will be the ultimate and extended legacy of COVID-19. SP

Toronto-based Michael Hlinka provides business commentary to CBC Radio One and a column syndicated across the CBC network.

“Lots of money has been printed and the issue many economists are debating is whether this will lead to inflation.”

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