As the tabling of the budget approaches in Quebec City, inflation is on everyone’s lips and coexists with the war in Ukraine at the top of the list of major concerns. Households and businesses are in austerity mode. Concern is palpable among SMEs. In a research note published this week by the Canadian Federation of Independent Business (CFIB), nearly three-quarters of Quebec SMEs name the increase in prices (of fuel, food products, insurance, other inputs) as being among their top concerns, if not their biggest challenge in 2022. Labor shortages come second, joining 67% of respondents, followed closely by supply chain distortions (64%).
With regard to the effects felt, 60% answer that inflation has significant repercussions, while a quarter speak of moderate consequences. In other words, they are only 11% to describe the repercussions as slight and only 3% to not suffer the effects. And many fear that inflationary pressures will last: nearly three-quarters of respondents expect this problem to last.
For 73% of SMEs surveyed, the first measure taken to deal with inflation is to increase prices, while 38% say they have to take a temporary reduction in their profit margin in order to remain competitive, adds the CFIB. This price sensitivity was already palpable once the restrictions linked to the pandemic were lifted. Only 43% of Quebec SMEs have returned to income equal to or greater than normal. “When asked about the main reasons explaining the absence of normal income, 28% of SMEs mention that they have been forced to increase their prices and that customers are not inclined to pay. »
Other measures adopted: 29% plan to reduce their investments and revise their growth forecasts downwards. In order to take the hit, others increase their debt capacity or use their personal savings (23%) and reduce certain costs (19%), in particular by changing suppliers. A significant portion (12%) are reviewing their business model and focusing on innovation (automation, transition to online sales, etc.).
These companies will also have to combine with a reduction in consumer spending and a readjustment of household budgets. “Gasoline, transport, food and real estate prices have risen the most in the past two years. If the trend continues, the burden of these price increases on household budgets could slow consumer spending,” summarized Pierre Cléroux, chief economist at the Business Development Bank of Canada.
Wealth effect reduced
So if we believed that the mountain of excess savings accumulated during the pandemic would serve as a softener for the inflationary shock, it seems that we would now have gone elsewhere.
The Canadian Press revealed Friday the results of a poll conducted by the firm Léger, noting that most Canadians are looking to reduce their expenses in the wake of the increase in the cost of living. About 80% of respondents indicate that they have started buying cheaper foods in grocery stores, or even given up on buying fruits and vegetables in favor of lower quality foods, and that they are increasingly avoiding to throw away food. Three-quarters of respondents will reduce household expenses and go to restaurants less often. Half have started to reduce the use of their car in order to save gas, and the purchase of an electric vehicle is considered by a third of the participants in the survey.
Rising interest rates
Added to the picture is the interest rate hike that the Bank of Canada has just started.
The results of another survey, released by the Angus Reid Institute, indicate that both mortgage payments and rents were already putting pressure on household budgets before the monetary tightening began. Thus, 58% of respondents who own their homes and 74% of respondents who rent their homes say that their monthly payments reduce other budget items.
Only 26% of tenant respondents (42% of owners) say they can make their payments without difficulty. And 29% (compared to 12%) say these payments are disruptive to their lifestyle, or even difficult to meet. They are also 23% and 12% respectively to affirm not being able to face an unexpected expense.
Faced with soaring prices for groceries, 65% of respondents point out that respecting the budget allocated to food is becoming difficult. Thus, 92% are already modifying their behavior by reducing eating out and relying on cheaper brands.
Overall, decreasing discretionary spending (for 53% of respondents), postponing major purchases (41%), reducing driving (31%), canceling or postponing travel plans (29%) and the postponement or cessation of RRSP contributions (22%) now make up the daily lot of many households.