07:08 AM EDT, 08/22/2024 (MT Newswires) -- While financial markets are calm, there's a major disruption underway in Canada as the two largest railways (CN and CPKC) shut down operations overnight Wednesday after failing to reach an agreement with their unionized workers, noted Bank of Montreal (BMO).

This could shape up to be yet another negative supply shock for the Canadian economy where the consequences, at least temporarily, are growth negative and inflation positive, said the bank.

Consider that the rail supply chain is a key link in the delivery of consumer goods and in industries such as agriculture, autos and oil & natural gas, pointed out BMO. Some passenger commuting lines also be impacted. Historically, these disruptions have ended relatively quickly through some form of back-to-work legislation, but the economic impact mounts with each passing day.

Two good examples can be found in 2012 and 2019, where similar strike action lasted roughly eight days. Both of those episodes saw rail output directly fall 4%-to-6%, which is very small on the grand scale of the Canadian economy, added the bank. But, the wide reach of the industry was enough to carve roughly 0.1 pps from overall growth in each of those episodes.

BMO is working on a similar assumption of about 0.1 ppt per week this time around, but the impact could build the longer it drags on. Also, with an election looming before the end of 2025, this has the potential to become a bit of a political hot potato. The NDP likely won't support any legislation that forces workers back on the job, which could leave the Liberals seeking support from the Conservatives (as was the case during the 2021 Montreal port strike).

The Canadian dollar (CAD or loonie) is little changed at $1.358/USD (73.6 US cents) early Thursday, according to BMO.