Preparing your business for downward economic cycles and inflationary pressure.
Whether you’re talking about the price of gas, heating your home or feeding your family, just hearing the word “inflation” can cause unwanted anxiety. For small business owners, inflation may carry even more weight.
Whether your business is brick and mortar or virtual, an established enterprise or you’re just in the process of starting a small business, understanding the impact of inflation on operating expenses is vital to ensuring your continued success.
As the effects of the COVID era continue to fade into the background, economists predict¹ that inflation will remain high throughout the first half of the year, meaning there may be some belt-tightening to come. However, there could be good news on the horizon.
Here’s the general outlook according to a pair of recent reports by TD economist Andrew Hencic and research analyst Tarek Attia (Hencic & Attia. TD Bank. 2022)1, and Rishi Sondhi (Sondhi. TD Bank. 2023)².
• Inflation continues to linger at elevated levels in most advanced economies, although there are initial signs of relief from improving supply chain conditions and softening raw input prices.
• Labour markets remain tight in most of the G7 and supportive of strong wage growth.
• Rate hikes by central banks will work to tame inflation, but the effects of policy rate changes can take months to manifest themselves.
If we take a deeper dive into a few of the issues, whether you’re running an online business or a small manufacturing plant, there’s a lot to keep your eye on. Understanding inflation and reviewing posted rates can help small business owners as they build projections into business plans and cash flow assumptions.
Inflation Pricing
According to Hencic and Attia, recent reductions in the prices of certain consumer goods and business supplies can largely be attributed to government policies, not market forces.
While government intervention might be helpful in the short term, the story is different longer term. In fact, business-as-usual costs for commodities like electricity and natural gas might begin to see increases as we move into 2023. (More on that below.)
Housing Markets
Housing is another key indicator of where the economy may be headed. TD Economist Rishi Sondhi explains that while the housing market should find its bottom in 2023, conditions were already soft in most markets across Canada as 2022 drew to a close, which may result in some ongoing stability. (Sondhi. TD Bank. 2023)²
Top 2 factors impacting inflation
1. Commodity Prices
2022 was fraught with issues that have had major impacts on global commodity prices. The largest of these, the Russian invasion of Ukraine, saw prices for commodities like natural gas and other fuels reaching extremely high levels. The initial shock seems to be easing a bit as global demand appears to be weakening. Still, with tight limits on supplies, the high prices you’re experiencing may still be in effect in the coming months. Always keep an eye on the utility costs needed to run your small business and track how they impact your bottom line.
One upside, supply chains are tracking to return to pre-pandemic norms. As backlogs work their way through the system, this could mean shorter delivery times and lower freight costs for raw materials and supplies.
Small Business Roundup
When it comes to policy rates, here’s what small business owners need to know:
• As rates continue to rise and spending minimizes, business owners should plan ahead for potential increases to loan repayment amounts.
• If you have a variable rate on your line of credit, regularly check the applicable interest rates posted by TD 3.
• Higher interest rates mean savings accounts and GICs might pay more interest, making this a good time to review your savings options and speak to your Account Manager Small Business.
• Review repayment schedules often in case an opportunity to lock in at a lower rate appears on the horizon.
• Review financing options with your Account Manager Small Business to determine whether a fixed or variable rate might fit your business needs.
The 2023 economic outlook is likely headed for some ups and downs. Whether you’re starting, growing or managing your business, or you’re ready to hand over the reins to someone else, TD is always here to provide banking advice. In the meantime, if you’d like to learn more about the possible impacts of inflation on your business, read the complete report by Hencic and Attia now. 1
Citations
1 Hencic, Andrew, and Tarek Attia. "Inflation Tracker." Economics.TD.Com. TD Bank Canada, October 4, 2022. https://economics.td.com/gbl-inflation-tracker.
2 Sondhi, Rishi. “Provincial Housing Market Outlook: Home Sales and Prices Should Find Their Bottom This Year.” Economics.TD.Com. TD Bank Canada, January 10, 2023. https://economics.td.com/ca-provincial-housing-outlook
3 TD.ca. TD Bank, Canada. December 21, 2022. https://www.td.com/ca/en/business-banking/small-business/interest-rates/
⁴Analyst - Customer Service & Support Research Team. "Align Customer Service Reps With Organizational Goals." Gartner. Gartner, Inc., July 19, 2022.
Inline Citations for Reference
Inline: (Hencic & Attia. TD Bank. 2022)
Inline: (Gartner, Inc. 2022)
Inline: (Sondhi. TD Bank. 2023)