Canada’s economy performed better than analysts expected in the third quarter, but gathering storm clouds could soon impact the promotional industry.
Statistics Canada reports that Canada’s economy grew 2.9% in the third quarter, up from 3.2% in the second quarter, but still a better performance than experts expected. However, the good news was tempered by reports that consumer spending fell in the third quarter due to persistent inflation and high interest rates. A resulting drop in pre-holiday shopping has left retailers piling on too much inventory that they are struggling to offload.
Growth was fueled by a surge in exports, including crude oil and bitumen, and the start of non-residential construction; it has been dampened by a slowdown in residential investment as house prices and overall housing activity have fallen.
Meanwhile, the headline inflation rate fell to 6.9% in September from 7.6% in July to 7% in August in the third quarter, which remained stable into the fourth quarter. Inflation peaked at 8.1% in June – since March the Bank of Canada has been trying to contain it with a series of rate hikes. The seventh and final hike of the year came on December 7, when the bank raised interest rates by half a percentage point to 4.25%. It’s the latest move in one of the fastest monetary tightening cycles in the bank’s history.
Analysts say the economy will slow further in the fourth quarter in response, although wages rose 5.6% yoy in October. Unemployment fell slightly from 5.2% in September and October to 5.1% in November as the country added 10,000 new jobs, mostly in finance, insurance, real estate, rental and leasing, manufacturing, information, and culture Leisure. The sectors with the highest turnover were construction, wholesale and retail.
But last month, the entire economy was shaken as tech companies — including big names like Amazon, Meta and Twitter — announced they were laying off tens of thousands of employees around the world as a recession loomed. In the spring, Meta planned aggressive hiring in Canada to hire about 2,500 employees. However, last month CEO Mark Zuckerberg said the Californian company would cut 13% of its global workforce, or about 11,000 jobs. In a letter to employees, he blamed overly aggressive growth in response to COVID-era consumer trends, which have since slowed.
Promo end customers keep buying
Meanwhile, the promo industry in Canada continues to enjoy the post-COVID shopping frenzy after many months of strict lockdowns during the pandemic. Danny Braunstein, the Winnipeg-based director of client success for top 40 retailer BAMKO (asi/131431) in Canada, says Q3 was a record quarter for his company. “We’re hearing some economic headwinds,” he adds. “The combination of higher interest rates and high inflation is putting a lot of pressure on companies to budget and spend wisely.”
While keeping an eye on the layoffs, Braunstein says that so far they have occurred in specific industries like tech and less frequently in sectors like manufacturing. He also looks forward to further improvements in the supply chain. In fact, the Chinese government announced this week that it was lifting many restrictions and testing requirements that were part of its “zero-COVID” policy, leaving promotional product companies cautiously optimistic about further improvements.
“Right now, the supply chain is marginally better and freight rates are down, but staffing remains a challenge,” says Braunstein.
“The combination of higher interest rates and high inflation is putting a lot of pressure on companies to budget and spend wisely.” Danny Braunstein, BAMKO Canada
At Lineaire Infographie Inc. (asi/253727) in Laval, QC, President Guy Fortier says third-quarter sales are up 40% year-on-year and fourth-quarter numbers are on track, up 30% to those of 2021. “We really don’t see customer purchases being impacted by interest rate pressures,” he says. “Some have expressed concerns about layoffs, but staff shortages remain an issue. However, the supply chain has gotten better and we expect it to continue to improve next year.”
Sergio Munoz, vice president of business development at Debco, based in Vaughan, ON, part of top 40 suppliers HPG (asi/61966), also says they haven’t yet felt the impact of a recession on sales as they continue to are struggling with staffing problems. “It’s hard to tell if we’re running pent-up demand or an aggressive Q4 business, but our print shop hasn’t stopped all year,” he says. “We are fortunate to have a very busy Q3 and Q4.”
Faster-than-expected growth in Q3 and low unemployment rate early in Q4 point to some stabilization, says Munoz, which “gives me an optimistic outlook for the rest of the year and into early 2023.”