How to cure cash-flow crisis amid COVID-19
Will we spend our mountains of saved money to rescue the economy?
James Lorimer Ilsley managed Canada's fiscal affairs during the Second World War, overseeing an unprecedented period of government spending as the finance minister in William Lyon Mackenzie King's cabinet.
By June 1946, though, Ilsley and others were eyeing the finances of everyday Canadians. And, as he observed in a speech in the House of Commons, the amount of money saved by many people had shot up during the war, helped by the purchase of bonds used to bankroll the fight.
The question back then was what to do with this thrifty trend now that the war was over. The answer was to introduce the Canada Savings Bond, a tool of retail investment and debt finance that helped fund the federal government for decades.
“I believe that ( honourable) members will agree that it is important to any country that great numbers of citizens should continue to acquire and to hold a tangible stake in their nation,” Ilsley said at the time, according to a record of parliamentary debates.
Fast forward 74 years and Ilsley's successors have similarly found themselves in a period of massive government expenditure, this time brought on by the coronavirus pandemic, which has spurred spending on a number of support programs for people and businesses.
What's more, citizens have once more amassed a considerable amount of savings in the midst of a crisis — which prompted a drop in consumer spending — and the federal government again sees those reserves as crucial to the country's well-being. In Ottawa, the quality of the post-pandemic recovery will hinge, at least in part, on the shopping habits of Canadians.
“Unleashing these savings will be a key element of the government's recovery plan,” declared the Fall Economic Statement put out at the end of November by Prime Minister Justin Trudeau's government.
But plans being drawn up in Ottawa to help liberate that mountain of cash might differ somewhat from those being drawn up in the minds of Canadians.
For one thing, the excess cash sloshing around bank accounts may be disproportionately held by those who already had plenty of it. Other people and some businesses, still cautious because of the pandemic's lingering economic effects, may choose to sit on their wallets a while longer, or even more often than before the pandemic's arrival.
Canadians, though, may not need that much convincing to tap their personal reserves. Economists anticipate that a chunk of savings will be spent on things that were made unavailable or unappealing by the pandemic, such as dining out, brick-and-mortar retail shopping and travelling abroad.
“I don't actually believe for a second Canadians have become big savers,” said Craig Alexander, chief economist at Deloitte Canada. “I think what happened was people saved money because they couldn't spend it.”
In PRE-COVID-19 times, the household savings rate hovered somewhere between zero and a bit more than five per cent of disposable income, Statistics Canada data show. It then shot up to a seasonally-adjusted annual rate of 5.9 per cent in the first quarter of 2020, 27.5 per cent in the second quarter and 14.6 per cent in the third quarter, according to the agency.
Canadian Imperial Bank of Commerce economists in November estimated families and businesses were sitting on a record amount of excess cash, amounting to at least $170 billion. Households were responsible for $90 billion or so of that stockpile, equal to about $2,368 per Canadian.
CIBC'S Benjamin Tal and Katherine Judge suspect that most of the extra money ended up in the chequing accounts of mid- and high-income households, since lower-income Canadians bore the brunt of the job losses and a large amount of income in those households is spent on necessities.
Canadian households were set to save $200 billion more in 2020 than 2019, according to a Capital Economics forecast in December, as well as another $50 billion above pre-pandemic levels in the first half of 2021. It's around that time the research firm sees most Covid-19-related restrictions being lifted and, with no “obvious trigger” for people to drive down their debt levels, the savings rate could head for more normal territory quicker than usual after a recession.
“In fact, if households chose to spend both the same share of their employment earnings as before the pandemic, and also to run down their higher stock of savings, the saving rate would drop to far below the pre-pandemic norm and consumption would leap above its pre-pandemic trend,” Stephen Brown, senior Canada economist at Capital Economics, said in a note.
A return to normal spending levels could be welcomed by Ottawa. The federal Liberal government in its fall economic update noted that the initial pick-up in savings helped fuel retail and consumer spending during the summer and fall after the first-wave restrictions were lifted, and before COVID-19'S second wave walloped the country and forced provinces to reimpose them. The government is now counting on a similar phenomenon to play out once the virus is again reined in.
“These savings are a preloaded stimulus Canadians will be able to deploy once the virus is vanquished and the economy fully reopens,” the Fall Economic Statement said.
Canadian households and businesses could be ready to oblige Ottawa in this regard. Keeping cash levels where they are “is hardly optimal and is thus unsustainable,” CIBC economists said in November, leading them to predict excess savings would be spent in short order after the uncertain winter months.
“Pent-up demand from mid- and high-income households will be utilized rapidly, while businesses will be eager to deploy their cash in a more productive way,” Tal and Judge wrote.
The beneficiaries of savings-fuelled spending are likely to include some of the sectors that have been most wounded by the pandemic, such as travel and hospitality. After all, Canadians may want to shake off Covid-19-caused doldrums, and a nice vacation, shopping trip or delicious meal served somewhere other than home could do the trick.
Toronto-dominion Bank senior economist Sri Thanabalasingam in a Dec. 22 report said Canadians had built up excess savings of nearly $150 billion over the second and third quarters of 2020. Most of that, he predicted, likely ended up in the accounts of wealthier households historically accustomed to spending more at restaurants and hotels, and on clothes and having fun.
“A widely available vaccine will allow for households to normalize spending patterns, while also spending more of their savings,” Thanabalasingam said.
The large sums of cash lying around could be put toward bigger purchases, too, such as residential real estate (an asset class that has held up so far during the pandemic) or a brand-new car.
A Dec. 1 report from the Bank of Nova Scotia's economics unit said Canadian auto sales fell by 9.5 per cent in November compared to the previous month, and by 10.4 per cent from a year earlier. Rising COVID-19 cases and waning consumer confidence might have played a role in the dip, along with renewed government restrictions in response to the former.
“We expect sales to remain depressed in December, in line with earlier forecasts that would see sales end the year at around 1.56 (million) units,” Scotiabank's Rebekah Young wrote. “Much like first waves, however, we expect some activity to be pushed out into the new year and foresee a healthy rebound to 1.8 (million) units in 2021, albeit with some early-year headwinds until second waves are past.”
Several factors could blunt or delay a savings-assisted recovery. First and foremost is COVID-19, which hasn't been beaten and continues to hurt the economy.
The psychological impact of the virus could force consumers to hold their cash rather than spend it, at least until the pandemic is finally put to rest. The continuing presence of COVID-19 could also force more businesses to close or put more people out of work, something the federal government considered in its fall economic update.
“The savings that households built up during the spring lockdowns, from government support and lower spending, can be drawn upon in any second wave scenario for those seeing renewed layoffs,” the document stated.
Another dampening factor is that there may not be enough supply to meet demand, since some of the hardest-hit industries have shrunk or eliminated their offerings.
“For example, airlines suspended numerous flights and laid off thousands of people over the last several months,” TD'S Thanabalasingam wrote. “Even if demand for travel returns quickly, it will take time to get flights up and running again.”
The federal government certainly wants Canadians to spend some of their savings, as part of its intention to pump $100 billion in stimulus money over three years into the economy.
How exactly that will be done will likely be fleshed out further in the 2021 budget, though Ottawa's economic update said there will be a focus on investments “that act fast and help unleash some of the additional savings that have accumulated in Canadians' bank accounts and on businesses' balance sheets.”
Moreover, the federal government said it would work with labour and health-care unions, among others, to try to improve “retirement savings options for low- and modest-income workers, particularly those without existing workplace pension coverage.”
I don't actually believe for a second Canadians have become big savers. I think what happened was people saved money because they couldn't spend it.