Rail Shutdown’s Hit to Canada Seen Rising If Outage Lasts a Week

(Bloomberg) -- Canada’s railway shutdown will cause billions in dollars in damage to the country’s economy if it’s not resolved quickly, economists say.

Canadian National Railway Co. and Canadian Pacific Kansas City Ltd. locked out unionized workers represented by the Teamsters Canada Rail Conference early Thursday morning, shutting down 80% of the country’s rail network and blocking the flow of C$1 billion ($740 million) in goods per day. 

While analysts are split on how much the disruption will cost the economy, most warn that the indirect damage will grow over time — though that impact is difficult to measure. Some businesses and suppliers have prepared by diverting shipments in anticipation of the labor strife, but that can only soften the blow for so long.

A two-week lockout would shave as much as C$3 billion from the country’s nominal gross domestic product, including a C$1.3 billion hit to labor income and a C$1.25 billion loss to corporate profits, said the Conference Board of Canada.

Moody’s puts a higher price tag on the stoppage, saying it could hit nominal GDP by as much as as C$4.8 billion over 14 days. To make a noticeable dent in the economy of the US — Canada’s largest trading partner — the strike would have to go on even longer, Moody’s economist Brendan LaCerda said by phone.

Analysts say the economy could face deferred sales, growing stockpiles of inventories and goods shortages, as well as waning business and consumer confidence the longer the disruption lasts.

“The indirect effect on the economy would likely be much larger, particularly if the labor dispute lasted longer than a week,” Andrew Grantham, an economist with Canadian Imperial Bank of Commerce, wrote in a report to investors. He sees a 0.1 percentage point hit to real monthly output growth if the shutdown lasts one week.

The harm to indirectly affected industries is a big reason why many economists don’t expect the strike will last long — mounting costs to businesses and consumers will likely prompt swift intervention from Prime Minister Justin Trudeau’s government, most likely in the form of a request to the Canada Industrial Relations Board to impose binding arbitration.

The government could alternatively recall Parliament, which is currently on summer break, to pass back-to-work legislation, but that process could take longer and anger the labor movement whose support Trudeau has tried to court.

“The fact that the costs of shutting down Canada’s railroads are so huge makes it less likely that disruptions will last too long, with government likely to step in and order a return to work relatively quickly,” Claire Fan, an economist with the Royal Bank of Canada, said by email.

According to Benjamin Reitzes, a rates and macro strategist at Bank of Montreal, a “very rough estimate” of the impact of the strike would be a 0.1 percentage point hit to monthly GDP growth for every week the action continues. “The longer it lasts, the worse it likely gets,” he said by email, adding that the impact depends on how prepared businesses are for the disruption.

To be sure, some of the economic pain is likely to be reversed when the trains start running again. Bloomberg looked at recent rail strikes in Canada, and though none featured a simultaneous shutdown of Canada’s two rail giants, the impact on the country’s output has historically been limited. 

Canada’s economy has been supported by rapid population growth in recent years. And the country’s output is expected to grow 1.7% in 2025, matching the US for the fastest pace in the Group of Seven countries, according to a Bloomberg survey. 

Inflation slowed to a 2.5% yearly pace in July, and is expected to reach the Bank of Canada’s 2% target sometime next year. According to Grantham, while some consumer prices including fresh and frozen foods may rise, the impact of the strike on price pressures is likely to prove minimal.

“We’re actually starting from a level where inventory levels are actually quite elevated relative to demand,” he said in an interview. “That should lessen the inflation impact.”

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