Seismic Changes Looming for Business in Canada

by - 4 min read

Seismic Changes Looming for Business in Canada

by admin - 4 min read

by admin

Interest Rates

Change is in the air, though Canadians can be forgiven for wishing that they were bills after the month that we’ve had. Earlier in July, the Bank of Canada increased its overnight rate by .25 per cent after seven years of keeping it steady or cutting it to historic lows. The rise in interest rates will continue to trickle its way through the banks until it finally begins stinging the pocket books. Home owners with variable-rate mortgages, business owners using their line of credits and students paying off school loans will all feel the effects of the hike immediately.

Minimum Wage

The Ontario government has proposed legislation that would increase the minimum wage, which is currently set to rise with inflation from $11.40 an hour to $14 on January 1 and $15 by 2019. The Albertan legislature already announced that minimum wage in that province will rise to $15 an hour by next year. Loblaws Companies Ltd., Canada’s largest grocery chain warned that wage hikes would increase expenses by $190 million next year.

Galen Westen, Loblaws CEO, said that the wage increases are “the most significant in recent memory,” before he added that the company is going to automate more jobs in an effort to save money.

Critics argue that the raised minimum wage is unjustifiable since the hikes are well in excess of covering for inflation.

It’s understandable that businesses are nervous about ponying up for the largest minimum rate hike in history—up 87 per cent to $14 by January 1 and $15 by 2019. What’s more is that skilled workers who would normally be paid around $15 an hour will also be looking for a raise, thereby increasing the cost of labour across a variety of sectors and skills.

The Automotive Parts Manufacturers’ Association has already said that Ontario’s proposed minimum wage legislation will make it more difficult for auto parts manufacturers to keep skilled workers. A representative said that since workers are paid about $15 an hour already, they would be due for a raise since an unskilled worker would be paid the hourly rate that a car manufacturing.

Indebtedness

Scott Hannah, CEO of the Credit Counselling Society, said that Canadians are behaving more like their spend happy American cousins to the south.

“They used to be really comfortable with us having a car payment and having other debts, where in Canada, we used to be savers and somewhat debt-adverse. And we’re not anymore. We’re comfortable carrying debt.”

Credit monitoring firm Equifax calculated that Canadians owed $1.7 trillion in debt, up 7 per cent from the last year. the average Canadian consumer owed $22,125 at the end of March

The news spurred the International Monetary Foundation to release a warning that the country’s economic grown is at risk if the housing leg of the Canadian economy is kicked out from under it.

“What the IMF has said is what we know, is that there’s a level of household indebtedness in Canada that is significant,” Bill Morneau told reporters outside the House of Commons. “It’s something for us to watch. The housing market, of course, is something that we’re paying close attention to, so this was entirely expected.”

Housing Markets

If the housing market were a canary in a coal mine, then surely all the speculation around it would turn the bird into a hypochondriac. Real estate in Toronto has surged 77 per cent since 2008, nearly 10 times the pace of Canadian job growth. The result is that housing sector jobs outrank those in the oil and gas and mining sectors combined by one million, leaving many to speculate that the end is nigh after news of the increase in overnight interest rates, stricter regulations against foreign investors and high indebtedness.

Canadians were already one of the most indebted populations on the planet. Statistics Canada said in March that Canadians owed $1.67 in debt for every $1 in household disposable income, despite the fact that household income grew .9 per cent quarter-over-quarter. Toronto experienced its third straight monthly decline in sales, and expectations remain grim as interest rates rise.

“Highly indebted households have less flexibility to deal with sudden changes in their income,” said the Bank of Canada. “As the number of these households grows, it is more likely that adverse economic shocks to the households would significantly affect the economy and the financial system.

Competition in the Grocery Aisles

The grocery world was shaken up earlier this year after Amazon announced its blockbuster acquisition of Whole Foods for a cool $13.7 billion. Amazon, which has previously left Canadian customers out (see Prime Music and Amazon Echo), has already announced that online services will be extended to Canadian customers as well. Meanwhile, Loblaws has to defend its hometown superiority against invaders from across the pond. German grocers Aldi and Lidl have already made their presence known in the United States. The discount grocers have opened 13,000 stores in the last decade, secured 50 per cent of domestic sales and expanded internationally. Aldi and Lidl stores and already make up about seven per cent of the grocery market share in the United States.

Consumption Hit

Interest rate and minimum wage hikes will have a huge effect on the consumption habits of Canadians. Economists predict that people will be consuming fewer goods this year and likely spending less money on high-ticket items. A hot housing market always means that there will be a construction boom, and the economics of raising the minimum wage will likely mean a brief uptick in consumption, though other factors of production will certainly be affected. The Bank of Canada predicted that the contribution of housing to the economic market will fall to zero.

After the oil price slump in 2015, sales in Calgary’s housing market fell 5.5 per cent in one year and only began to stabilize this year.

The International Monetary Fund warned in a report earlier this month that there’s a risk that current fiscal measures “could exacerbate household balance sheet vulnerabilities and housing imbalances.”

“The jobs slowdown will not occur in a single month, but over a six-month to one-year period,” said Frances Donald, senior economist at Manulife Asset Management. “And the hit to consumption may take up to two years to be felt.  


 

 

Syed Haider | The Edge Blog

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