Often in the past, when Canada experienced a recession, there was a brief initial downturn followed by a slow recovery. It was only after five to seven years that the economy regained its full performance. What will happen this time when the population is vaccinated? It can go faster than in previous courses. The economy can recover and the recovery will not continue.
To fully understand what lies ahead in the near future, let’s take a look at the perspectives that open up to each of the four major groups of players driving the economy:
1) Households (you and me), with consumer spending;
2) businesses and their investments in stocks, construction and production equipment;
3) Governments, with their decisions on interest rates, spending on utilities, and investment in infrastructure;
4) Foreigners with their imports of goods and services from here.
Canadian families currently have a lot of money in the bank, ready to spend when vaccinations have beaten the pandemic. In 2020, they allocated $ 212 billion, 12 times more than in 2019 (18 billion). This sudden explosion in savings is due to a decrease in consumer spending despite an increase in disposable income.
On the one hand, reservations – mandatory or freely chosen – during both waves of the health crisis reduced consumer spending by 68 billion. People spend less on clothing, personal services, entertainment and leisure, hotel and restaurant outings, transportation and shopping abroad.
On the one hand, various financial support measures for victims of the pandemic, such as Canadian Emergency Relief (CEP), Canadian Economic Recovery Benefits (PCRE), Employment Insurance (EI), Canada Emergency Wage Payments (CUS) grants and the Federal Government Business Emergency Account (CUS) Canada (CUEC), has largely compensated for the direct loss of income caused by the decline in economic activity, economy and employment. Canadian household disposable income after tax and remittance payments increased by $ 126 billion.
If you calculate correctly, this $ 126 billion increase in disposable income combined with the $ 68 billion decrease in consumer spending led to an almost unintended increase of $ 194 billion in household savings from 2019 to 2020.
So a question arises: What will people do with all this money at the end of the epidemic, in the second half of 2021 and in 2022? They could be reluctant to spend their eggs, decide to use them to pay off their debts, or even explode by suddenly pumping 194 billion into the consumption cycle.
It is difficult to predict what will happen. However, even if households spend half of these forced savings, say, $ 100 billion, the impact on Canada’s economic recovery will already be significant. This will increase employment and lower the unemployment rate more quickly to the low levels for 2019, of 5% in Quebec and 6% in the rest of Canada.
The epidemic has hit businesses hard. In August 2020, more than 40% of them, especially SMEs, saw a decrease in income of 20% or more, compared to the previous year. A third of them had layoffs.
The challenge for survivors is twofold: replenishing their inventory and restarting business as sales increase, but also restructuring. Long before the pandemic, it was imperative to automate and digitize, online commerce and openness to remote work. But the urgency of these tasks has become more evident over the past year.
It will be difficult for companies in sectors where it is difficult to diverge and delay consumption is easy. Entertainment, culture, accommodation, food, and transportation, for example, has a big uphill battle. Fortunately, on the whole, restocking operations and investments in construction and new production equipment can now be funded at favorable interest rates. The base rate for commercial loans is only 2.45%.
Both monetary and fiscal policy will support the economic recovery.
Bank of Canada Governor Teve McCallem has reiterated his commitment to keeping the key interest rate at a minimum value of 0.25% until the economy is running at full capacity. As a result, interest rates on household and corporate borrowing are not expected to rise anytime soon.
The only risk is that inflation will rise beyond 2.5% or 3% if the economy is overheated. The Bank of Canada will then be encouraged to raise interest rates in order to dampen the desire to spend. However, neither the Bank of Canada, the US Federal Reserve, or the International Monetary Fund consider this to be a major risk.
On the budget front, there was a large deficit in the 2020-2021 fiscal year. Almost $ 400 billion in Ottawa, $ 40 billion in Toronto and $ 15 billion in Quebec. However, the responsible ministers have expressed no intention of dumping their finances in a period of austerity with tax increases and spending cuts that could harm the economic recovery. Instead, they pledged to “do whatever it takes” to support him.
Federal Finance Minister Chrystia Freeland has already announced that her budget will remain expansionary in 2021-2022. It gives itself the possibility, if the situation demands it, to inject another 70 to 100 billion dollars into the economy, to be distributed over the next three years. The same trend in the provinces. For example, from 2020 to 2021, public investment in infrastructure was increased to 15 billion in Ontario and 14 billion in Quebec.
The United States and the World
Exports, especially to the United States, play a major role in the economy here. In the third year 2019 Canadian production of goods and services went abroad, and a quarter to the United States. However, like the Bank of Canada, the US Federal Reserve wants to keep the interest rate as low as possible until full employment returns. Meanwhile, President Biden has just launched a massive financial program to fight the pandemic and help families, the unemployed, businesses, states and municipalities. His plan It should add $ 1.9 trillion to federal spending. This will be followed by an infrastructure restoration and development program.
As a result, many US forecasters expect that the coordinated policy of the Federal Reserve and the Biden administration will allow the US economy to operate at full capacity by 2022. This bodes well for a revival of Canadian exports. Towards the United States in the next two years, despite hints of protectionism among our neighbors to the south.
Finally, it is unlikely that economic developments elsewhere in the world during this time will dilute the positive impact of the US expansion on Canadian exports.
In general, it is quite possible that the economic recovery that will follow the end of the epidemic will be faster than the recovery that followed recessions in the past. If so, companies will soon start complaining about labor shortages again, but workers will be happy to find good jobs that have never been easier to find and keep. Both sides of the medal. We intersect.
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