Bank of Canada sees gradual recovery after initial bounceback

Cautious spending is likely to continue until a vaccine for the virus becomes available

The Bank of Canada is taking a more cautious tone on the recovery, with expectations for a bumpy and gradual road toward full recuperation.

While the central bank is seeing evidence of a quick, initial bounceback in economic activity as provinces reopen, the second stage of recovery will be more “prolonged and uneven,” Deputy Gov. Lawrence Schembri said in a speech to the Greater Saskatoon Chamber of Commerce.

“The uncertainty around this recuperation stage is extraordinary and points toward a recovery that will be gradual and long-lasting as this uncertainty slowly dissipates and household confidence is restored,” Schembri said in the remarks delivered by video-conference. “In the meantime, households are likely to remain cautious in their spending behaviour as they adjust to a new ‘postpandemic’ normal.”

It’s also unclear how consumer spending patterns may change in the future. During the pandemic, consumers increasingly turned toward online food shopping and delivery. Schembri said cautious spending is likely to continue until a vaccine becomes available. As a result of less money flow, employment and income will take time to recover fully.

The willingness of Canadians to go out and spend money is going to depend on what the employment, income and confidence situation is, as well as the possibility of future outbreaks, he said.

Recent data show hopeful signs for the labour market as job postings have picked up and employment rose. Still, Schembri said there are more persistent disruptions in the job market that could slow the recovery in the second phase such as permanent layoffs among those in the already struggling oil-producing regions. He also noted that women working in service industries have been disproportionately affected by the layoffs and that they are also more likely to face a lack of child care.

In the speech, Schembri expressed optimism that Canada avoided the worst of the economic fallout from COVID-19. Consumer confidence data, motor vehicle sales and housing activity in May have all improved from April.

“These early indicators suggest that the trough in economic activity and

household spending occurred in April and that the more severe outcome depicted in our April Monetary Policy Report has been avoided,” he said.

The federal government’s support programs have helped to buffer some of the income losses felt by millions of Canadians.

The federal aid is expected to help bolster consumer spending during the second phase of the recovery.

Schembri noted recent data has also shown a rise in the savings rate, which indicates there will be pent up demand when consumers begin to feel comfortable going out and spending money.

The provinces have reopened in staggered time frames which makes it difficult for the bank to estimate the overall recovery path. Ontario, for example has pursued a more gradual reopening than Saskatchewan and Alberta.

“We expect that the recovery will vary by region because containment measures are being lifted at different times across Canada,” he said.

“This staggered reopening of establishments and manufacturing facilities across the country adds an additional layer of uncertainty in estimating the path of the recovery in overall household spending.”