Why a boom could be here soon
Canadians have four times usual amount saved. They’re ready to spend, when they can
Driven by unprecedented levels of personal savings itching to be spent, Canada’s economy may balloon back to prepandemic levels by year’s end, many economists say.
But there are lots of pins around too, they add.
“It’s a combination optimistic/pessimistic story,” says University of Toronto economist Peter Dungan.
“Optimistic in the sense that there is a significant recovery coming in the second half of 2021,” Dungan says.
However, a drop in oil prices, excessive debt fears, foreign vacations and of course, the potential for a failed vaccine program all loom as threats in rosy economic forecasts.
But on the blooming, recovery side, Canadians are swimming in savings that they are salivating to spend.
Indeed, Canadians accumulated a pool of disposable income last year that is about four times larger than exists in normal times, says Pedro Antunes, chief economist with the Conference Board of Canada.
“This will be … the first recession that I’ve ever seen where we have household disposable income … actually rising strongly,” Antunes says.
One reason for this, he says, is the support programs governments have brought to the pandemic table have been more generous than the incomes lost to layoffs and shuttered businesses.
“And they’ve been more generous by a substantial amount,” he says.
“In fact, we’re expecting real disposable income growth (for 2020) of about
eight per cent … and that’s mostly in the bag (since) we have three quarters of data now.”
That growth in disposable income — the amount of money households have left after taxes and other spending — normally comes in at around four per cent in a good year and two per cent in a typical one, Antunes says.
“That means that our aggregate net savings have swelled (in 2020) … we’re hitting $200 billion,” he says. “That’s four times what we would have had in a good year.”
Indeed, in the half-decade preceding pandemic-ravaged 2020, savings came in at about $20 billion to $25 billion annually, Antunes says.
“So we’re at 10 times what we’ve had in the last little while,” he says.
So as soon as the vaccine kicks in — and employment prospects look more secure — there should be a burst of spending to lead the economy back to a more prosperous path, Antunes says.
David Soberman, Canadian National Chair of strategic marketing at the U of T’s Rotman School of Management, also predicts significant spending as soon as the vaccines are widely dispersed.
“There is going to be a lot of pent-up demand. People won’t have been out to restaurants for months, they will not have trav- elled for months (and) many will have delayed spending that they planned to do for a long time,” Soberman says.
“I think you’re going to see a big boom in the economy.”
James McKellar, a real estate and infrastructure expert at York University’s Schulich School of Business, watched in awe as his own savings have grown.
“I have to say from personal experience, now that we’ve been locked down since March, I’ve never seen my bank account grow like this before,” McKellar says.
“We’re not spending the money. And I look at my balance at the end of the month and say ‘What’s going on here?’ ”
McKellar says the answers are fairly easy.
“I’m not using the car very much, I’m not going to restaurants and dropping 150 bucks,” he says. “And because of the nature of shopping today, you become a lot more conscious of what you’re buying.”
McKellar agrees there will be the pent-up desire and wherewithal to spend post-pandemic. However, he wonders if the virus will have changed spending habits. He expects 25 to 30 per cent of what people are going to want to do is going to be different. For example, he doesn’t expect everyone will rush back to the airports.
Mark Kamstra, a professor of finance at York’s Schulich, cautions there are several factors that could blunt the economic benefits of a spending explosion.
“I agree that we’re going to spend more money and then there probably should be a boom when this all starts loosening up,” Kamstra says. “But I think some of the spending won’t help Canada, I think it will be trips to the U.S. and Europe.”
As well, Kamstra says, much of the country’s economy is now centred on the housing market and that might keep windfall money captive.
“I know what people do when they have homes, they spend too much money on their homes,” he says. “They buy granite countertops, they buy
new appliances, I’m expecting that that’s already started and will probably continue.”
While the country does have a manufacturing industry, many of the expensive household goods homeowners want are made out of the country, Kamstra says.
“Some of the pop will be bled away that way,” he says. “And I don’t think car sales will go up, they already kind of popped.”
Kamstra also says oil is and will continue to be a major driver of the country’s economy and that international volatility in the market could cool the effects of heated consumer spending.
“Even if we’ve got consumers willing to spend more money, if there’s uncertainty about what’s going to happen with players like Saudi Arabia really determining so much about the price of oil that really impacts Canada,” he says.
There will also be pressure on governments and the Bank of Canada to pull back on support programs and raise interest rates, both of which would slow economic growth, Kamstra says.
The Bank of Canada said Wednesday it is forecasting growth of four per cent this year, then 4.8 per cent next year and finally 2.5 per cent in 2023.
Getting there will be like riding a roller-coaster as the bank warned that resurgence in COVID-19, or new, more virulent strains, could weigh down a recovery in one quarter before leading to a strong upswing in the next.
Dungan, who also teaches at the Rotman and creates forecasts for the economic recovery with U of T colleague Steve Murphy, says the final quarter of 2019 — the last where COVID had no negative impact on the country’s GDP is a benchmark for recovery.
“And if you look at the 2019 number for the level of GDP, we get back to that number in the first quarter of 2022,” says Dungan. “We actually get back to the first quarter of 2020 by the third quarter of 2021,” he says of a fiscal span that the virus barely touched last year.
Antunes sees an even more accelerated return to a pre-COVID economy, with 2019 GDP numbers appearing by the end of 2021.
He sees a beefy 5.3 per cent GDP growth for all of this year, most of it coming in the second half and being led by the flush consumer spending.
“Now whether we’re a little too optimistic given what’s going on now with the closures in the first quarter — possibly,” Antunes says. “But we have essentially a very flat economy in the first half of the year with a strong pickup in the second.”
And at 5.3 per cent, the growth would leave Canadians with enough savings intact to help fuel the economy into 2022, Antunes says.
Vik Singh, an economist at Ryerson University’s Ted Rogers School of Management, fears a consumer driven recovery could be fleeting.
“Would it be sustainable or would it be a transitory phenomenon where basically there will be an uptick and the reality would come home, where we would find an economy that has been quite damaged due to COVID-19, especially with what we’re seeing with the second wave right now,” Singh says.
And no matter when it comes, there are caveats to any recovery — including the assumption that a vaccine will be widely and successfully administered by summer, Dungan says.
“We would have expected the economy to be growing if we hadn’t had the pandemic, we’d have more people to work, we’d have done some investment, had more houses and whatever,” he says. “So if you get back to the 2019 level in two years, that’s good … but it’s a moving target.” Meaning, we don’t know what we would have had if it hadn’t been for the virus.
Dungan says the country is unlikely to make up all the lost ground until 2024.
He says this pandemic hangover is likely to foster higher than normal levels of unemployment, which ended last year at 8.7 per cent — a full three points above the final quarter of 2019.
“And we have the unemployment rate in the first quarter of 2022 at seven,” Dungan says of his forecasting model.
“So that tells you that even if you get back to where you were in terms of the GDP levels (prepandemic), you have more workers now so you have a slightly higher unemployment number.”
It will take until 2023 to bring unemployment numbers back to pre-virus levels, Dungan predicts.
Longer term, the government debt accumulated during the pandemic — more than $400 billion by Ottawa alone — may also tap the brakes on a humming economy.
“We have borrowed a tremendous amount of money,” Antunes says, adding the country’s debt to GDP ratio has reached 95 to 100 per cent.
“Yes, it’s still perhaps manageable if interest rates stay very low, but I’m very concerned that interest rates might not stay as low as the central bankers and federal government might want to see,” Antunes says.
“I personally think the only way forward will be to … sooner or later, try to reduce that debt to GDP (ratio). That’s got to be the policy objective if we want to be able to have the wherewithal to fight the next crisis.”
Soberman agrees, saying the pandemic debt puts long-term economic growth in peril.
“There has been a lot of money spent to address the pandemic but this has created a tremendous amount of debt at various levels of government and that needs to be financed,” he says.
“My view of things — there is no free lunch,” said Soberman.