RSM Canada Supply Chain Index turns positive amid slowing economy

REAL ECONOMY BLOG | July 27, 2022

Authored by RSM Canada

The global supply chain is finally turning around as the economy enters a slowdown, consumer demand softens and some of the back-ordered goods from last year are finally arriving. Those changes are showing up in RSM Canada’s Supply Chain Index, which in June turned positive for the first time since February 2020.

The turnaround has been swift. Just three months ago, the index was reading at 2 standard deviations below normal, which suggested a serious deficiency.

What changed?

The most stunning and fundamental shift has occurred in inventory levels, which have risen across retail, wholesale and manufacturing. This has come about as a result of misinterpreting a sudden spike in demand as a long-run change.

Throughout much of the first two years of the pandemic, consumer demand for goods soared as spending on services was severely restricted. In addition, government stimulus and below-inflation interest rates left many households flush with cash, some of which inevitably made its way to consumer goods. Also, COVID-19 restrictions and supply chain disruptions around the globe prevented adequate inventory from arriving to shops and homes.

Fast forward to the middle of this year. The supply chain has not been unclogged—far from it. But faced with inflation and rising interest rates, together with the stoppage of stimulus money, consumers are cutting back on spending.

The reopening economy also diverted spending from goods back to services. All of these trends have led to lower demand for consumer goods, which even helps to drive down freight rates.

At the same time, businesses months ago ordered too many goods, basing their forecasts on an unusual spike in demand. That excess is leading to more and more goods arriving with fewer buyers, pushing up the inventory-to-sales ratio.

The piece of the equation that has yet to turn around is labour, as the worker shortage is still rampant in most sectors in the economy.

The outlook

Expect a flood of consumer goods to come in the next few months. Businesses that have made orders based on the shortages of last year will take awhile to adjust. At the same time, some businesses have moved to more localized suppliers and have shortened the supply chain.

For consumers, this can mean good news as they might see full shelves and discounts again. But inflation and high interest rates might decrease the goods on hand, which means consumers might not buy even the discounted items.

The takeaway

Global supply chain disruptions are far from over. Instead, we are seeing a yo-yo cycle where businesses that were running too lean and unable to meet demand are now overstocking just as demand softens.

It could be challenging to unload inventory as the economy slows; the cost of storage is by no means cheap. If anything, the consolation is inventory will be there when demand swings around again.