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COVID-19 continues to have significant impacts on the Canadian and global economy. The road to recovery from the COVID-19 pandemic has started with the rollout of the mass vaccination program, but Canadian businesses still face major challenges and an uncertain economic outlook. Canada’s economic recovery is on a slower pace than expected a few months ago with supply chains, labour markets and inflation being potential concerns in future periods. According to Deloitte, Canadian economic growth is expected to be 4.9 per cent in 2021 and 4.3 per cent in 2022.
Guelph economic outlook
Economic growth is expected to rebound strongly in 2021 as pandemic-related restrictions ease, propelled by the city’s very diverse economy that is underpinned by a robust manufacturing sector and large public sector.
According to S&P Global, Guelph’s economy will recover over the next two years as COVID-19 pandemic-related restrictions ease. “We believe the city has a strong local economy, owing in part to a broad manufacturing sector and a large public sector, consisting of a university, schools, hospitals, and municipal administrations.”
According to the Statistics Canada September report, “The unemployment rate fell for the fourth consecutive month in September, down 0.2 percentage points to 6.9 per cent, the lowest rate since the onset of the pandemic. In the months leading up to the pandemic, the unemployment rate had hovered around historic lows and was 5.7 per cent in February 2020.”
The city employment rate tends to outperform the broader Canadian rate and the Guelph CMA rate is estimated to be slightly below the national level of 6.9 per cent.
Interest rate environment
The Bank of Canada’s Policy Interest Rate forms the basis of what the market will pay for debt and investments. In March 2020 the Bank of Canada cut its Policy Interest Rate three times to respond to COVID-19, taking the target rate from 1.75 per cent down to 0.25 per cent. The overnight rate has remained at 0.25 per cent since March 27, 2020.
This affects the City of Guelph in two key areas:
- Borrowing: Low rates decrease borrowing costs for debt financed projects. This has a positive impact by reducing the interest costs of debt and reducing the funding required to fund debt funded capital projects.
- Investments: Low rates decrease the amount of investment income, since the rate of return on surplus cash and investments is directly linked to interest rates. As longer-term holdings mature in this low-rate environment they cannot be reinvested at the same rate which reduces the amount of investment income available.
Credit rating affirmed at AA+
A credit rating is an independent assessment of the risk of an organization of borrowing money and its ability to repay its debt. The City of Guelph has maintained a strong fiscal position throughout the pandemic resulting in a steady credit rating of AA+. This rating is reflective of the great work being done at the City and the resilience of the local economy.
S&P Global provided the following rationale for this rating, “The economy is expected to rebound in 2021 thanks to Guelph’s resilient workforce, diverse employment base, and the attractiveness of the city as a destination for economic development. In addition, we expect that its prudent financial management and cost-containment efforts will help the city to continue generating robust operating surpluses in the next several years.”
The Canadian and Ontario governments have responded to the crisis with unprecedented amounts of stimulus funding for individuals, businesses and other levels of government. The City has received a total of $17.2 million in Safe Restart funding that has assisted in offsetting the financial impact of COVID-19. In particular these funds were used to offset reduced revenues in parking, recreation and culture and transit services. Further, a number of capital grants have been received including the doubling of the Canada Community-Building Fund (previously the federal gas tax fund), provided an additional $8 million. There have also been a number of program specific grants targeting additional health and safety cost recovery in long-term care, public health, paramedic and fire services.
COVID-19 has caused a massive disruption in global supply chains. Many factories were closed or reduced capacity due to lockdowns and have not returned to pre-pandemic levels. In other cases, factories shifted to making different products due to changes in demand during the pandemic and there can be a long lead time to shift production back. The transportation sector has also been disrupted with lower air traffic reducing the air cargo capacity, a shortage of truck drivers to haul goods, and increased regulation and backlogs at seaports.
All of these factors have combined increase the lead time and reduce the supply of many key components and has the ultimate effect of increasing prices for many of the materials that the City requires. Staff are monitoring the impacts and have started to consider how to address price increases that are higher than approved budgets.
Inflationary cost pressures on the budget
Inflation is commonly defined as the general increase in prices for goods and services in an economy over a period of time. The Bank of Canada produces the monthly Consumer Price Index (CPI) that tracks changes in consumer prices.
Consumer Price Index (CPI)
The Bank of Canada Consumer Price Index (CPI) is the most common measure of inflation and tracks changes in consumer prices. The Bank of Canada maintains an inflation target of two per cent in order to support economic growth and curb inflation. The most recent published CPI for Canada is 4.1 per cent which is well above the Bank of Canada target.
This is the highest inflation rate in over 10 years and is due to many of the factors listed above. Low interest rates and government stimulus lead to a surplus of cash in the markets. Lockdowns reduced consumer spending on many goods and services and as restriction ease there is pend up demand. This is coupled with reduced supply and supply chain issues which together put upward pressure on prices.
Construction Price Index (BCPI)
Typically, municipal costs of goods trend higher than the general CPI rate. Another price index which may more closely match the municipal costs of goods and services is the Building Construction Price Index. This index measures the change over time in contractors’ prices to construct new Industrial Commercial Institutional and residential buildings.
The latest published non-residential construction price index for second quarter 2021 in Toronto was 7.7 per cent. This impacts the cost of capital projects as the amount allocated to fund capital must keep pace with inflation, otherwise the amount of capital funding available would shrink relative to the operating budget and have the effect of increasing the infrastructure backlog.
Annual inflationary increases generally raise the cost to do business. This is similar to annual increases consumers experience for groceries. These are the increased costs of delivering the same service or program to residents.
What are the City’s inflationary cost pressures?
- The largest component of inflationary pressure, representing 49 per cent of the total expenditure budget, is the salary, wages and benefits that are negotiated between the City and its workforce for a specified period of time. The City has seven collective bargaining unions and one non-union management group. The City’s associated agencies and boards also have collective bargaining unions in their workforces like the Guelph Police Service and Guelph Public Library.
- Paying utility bills for City-owned buildings and facilities—to keep the water running and lights on.
- Vehicle and equipment maintenance and fuel; we have more than 1,200 fleet assets that are maintained including police cars, ambulances, fire trucks, transit buses, garbage collection packers, snowplows and bylaw vehicles. We need to keep these in good working order to deliver service to the community.
- Most of the materials and supplies used by the City are construction or health-related like asphalt, pipes, medical supplies and cleaning materials which rise generally higher than similar household items.
- Increased pressure due to rise in costs for contracted services such as waste haulage, and software licencing for the right to use the existing technologies. Licencing cost annual increases are higher than general consumer goods increase.
- Market prices for insurance, including premiums for long-term disability insurance have been increasing at a higher than most general goods and services.
How does the City mitigate inflationary pressures?
Like a business, the City as a priority looks within with a focus on cost containment and continuous improvement to find ways to do more with less resources. Examples of some initiatives that are lowering the inflationary pressure on the budget include:
- Continuing to implement energy efficiency initiatives that mitigate utility cost increases.
- Workflow and process automation, reducing the cost of paper, printing costs, staff time, and increasing capacity.
- Virtual meetings to reduce mileage costs and staff time commuting between facilities.
- Renegotiating costs, revenue and cost sharing agreements with partners, and other service providers.
- Investing in innovation and modernizing payment options for customers and residents, the ability to pay a City fee at any City facility.
- Leveraging reserves to smooth in large cost increases and spread over a longer period of time. This is one advantage of multi-year budgets.
- Service review and rationalization to identify services that are not meeting the expected service level. Usage and demand data can highlight underperforming programs, parkades, roads, transit routes, facilities and even parks or trails.
- Keeping user fee and rate revenues with pace of inflation, just like a business. There is a reasonable expectation that as costs rise, the price that your customer pays for your service must rise or the business will not remain viable.