The Insights

  • Pandemic-era supply-chain disruptions have kept the good-producing sector from fully meeting rising demand, pushing up prices for firms and households.
  • As the economy reopens, consumer spending is already rotating from goods to services; this will help ease supply-chain pressures over time.
  • Post-pandemic, we believe labour shortages and climate risks will remain challenges to the global supply chain.

The Stakes

Supply-chain bottlenecks have played a major role in recent inflation worries. Shortages of key inputs and shipping delays have paused manufacturing production and hindered growth. Higher input and transportation prices have challenged businesses, and the related spike in prices for consumer products—notably building products and vehicles—has eroded households’ purchasing power.

The Context

The pandemic upended consumers’ spending patterns, leading them to spend more on physical products and less on services that were basically out of reach due to lockdowns. Goods producers struggled to keep up with surging demand for household goods and home-renovation products, even as they contended with higher shipping-container costs and commodity prices. The challenge was especially acute in the auto sector, where a global chip shortage lowered Canadian auto production by half between last April and June, just as consumers were starting to shop for vehicles to avoid transit or to accommodate a move to the suburbs.

For the 10% of the Canadian economy accounted for by manufacturing, supply-chain bottlenecks have been a bigger problem than virus-containment measures.

Our Analysis

Global supply-chain pressures will ease over time as production resources are reallocated to areas seeing the most demand and price increases. Meanwhile, a rotation in household spending—away from things like furniture and electronics and towards services including travel and leisure—will take the heat off production capacity. That process is already underway in places, including Canada, where virus-containment measures are easing. We’ve already seen the effect on lumber prices, which soared to record highs in the spring and have since fallen by over 70%.

Meanwhile, major chipmakers globally have been working to boost output. In Canada, import volumes of industrial equipment, machinery and parts were 12.4% above pre-pandemic levels in May. It will take time for those new investments, at home and abroad, to turn into new production. Until then, disruptions will continue to limit growth in the industrial sector and will keep prices for some products high.

Uneven global vaccine distribution means the virus will remain an economic risk. Further rounds of significant lockdowns in Canada look less likely given a relatively successful domestic vaccine rollout. But disruptions to critical production in any region abroad can still create ripples at home given tightly integrated global supply chains. The good news is that vaccine distribution abroad is also ramping up, albeit still more slowly in some emerging economies. Among those regions that Canadian manufacturers are most directly exposed to, vaccination rates are relatively high. The three countries that directly account for the bulk of value-added in gross manufacturing imports, namely the U.S., China and Germany, have all seen significant progress in vaccinations.

Canadian labour shortages, a problem pre-dating the pandemic, could be a longer-lasting constraint. Despite still-high unemployment levels (expected to dial lower as hospitality workers are rehired), businesses, particularly in the industrial sector, are reporting hiring difficulties again. Further growth in output will be increasingly difficult to come by without adequate labour supply. In addition, businesses will be forced to pay more to attract workers, piling onto inflationary pressure that’s already in place.

Adverse climate events are also shaping up to be a longer-term concern. Recent wildfires in British Columbia disrupted key rail routes extending outside the province, exacerbating delays in shipping that were already severe due to a global container shortage. It will take a global effort, in moving forward with vaccinations and addressing climate change, to help safeguard the supply chain’s functionality in the long run.

This report was authored by Senior Economist, Nathan Janzen, and Economist, Claire Fan.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.