New global risks arise amid gradual post-pandemic recovery

Even as the events in Ukraine has dominated headlines and stokes fresh uncertainty, Canada and the world are facing economic challenges that go far beyond the conflicts in the region.

According to a new commentary from RBC Economics, the Russian invasion will undoubtedly aggravate already-existing pressures.

“Even before the escalation in geopolitical risk, production capacity limits—including acute labour shortages and rising input costs—were emerging as more significant concerns for businesses than any shortfall in orders,” said RBC economists Craig Wright and Dawn Desjardins, along with analyst Nathan Janzen. The invasion of Ukraine has jolted financial markets, pushed commodity prices higher, and posed a threat to already strained global supply lines.

While improving labor markets, growing earnings, and savings acquired during the pandemic are expected to support household purchasing power, they cited strong demand and businesses’ ability to ramp up production as factors for broadening inflation. That has created a strong motivation for central banks to stay on their paths toward rate hikes.

Oil and gas company profits, as well as provincial royalty receipts in Alberta and other oil-producing provinces, will rise with oil prices, they said. Drilling activity for oil and gas will almost probably increase but given the high level of uncertainty about where prices will finally settle, the report predicted a cautious investment response.

“This will limit the impact on job growth directly and indirectly tied to the sector,” they said. “The burden of higher commodity prices, on the other hand, will be felt more broadly across Canada as consumer prices rise.”

With harsh sanctions and the threat of supply and transportation interruptions, the fighting in Ukraine has severely affected trade in the region, sending some commodities prices rising. Oil prices soared beyond USD 120 per barrel, a high not seen since 2008.

RBC Economics also pointed out that, since both Russia and Ukraine are important agricultural exporters, higher oil costs and anticipated agricultural output interruptions will drive up global food and energy prices. The possibility of future escalation adds a new layer of geopolitical concern to the global economic outlook.

However, there are grounds to believe supply-chain disruptions may become less common. As COVID-19 restrictions soften, consumer demand is projected to shift to services rather than products. Still, the knock-on consequences of Russian invasion-related disturbances may lengthen the process.

“Even if global supply chains swiftly recover, labor shortages are projected to remain a stumbling block to output growth,” the commentary said. “Indeed, for many companies, maintaining and hiring new employees has become a greater issue than a lack of orders.”

Many enterprises in higher-contact service-sectors severely damaged by the pandemic have seen a large portion of pre-pandemic staff relocate to other jobs or industries. In practically all industries in Canada, the number of unemployed people per job posting is below pre-pandemic levels; in the accommodation and food services industry, the number of workers is still more than 300,000 below pre-COVID-19 levels as of January.

RBC noted that tight labor markets are a positive economic sign, indicating that the economy has largely recovered. The authors said the percentage of employees who change jobs every month is on the rise, noting that type of job-switching accounts for more salary growth than within-job pay increases. More people are departing occupations owing to 'dissatisfaction' without a quick replacement position, indicating that worker trust in labor markets has strengthened.

Businesses in Canada anticipate hiring more workers and pay more for them, but they're also making investments to enhance existing workforce productivity in response to rising demand, RBC said. Most industries expect to invest more in 2022 than they did before COVID-19 occurred in 2019.