Recovering from ‘the most abnormal recession’

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Text transcript

Benjamin Tal, deputy chief economist, CIBC.

This recession is the most abnormal recession in Canadian history. It is abnormal because it’s asymmetrical on so many dimensions. For example, every recession in the past was led by the goods-producing segment of the economy. This one, because of the nature of the crisis, is led by the service sector. This means that you see a situation in which when governments support households directly or indirectly and you follow the money, you see that most of the money that is being spent by Canadians goes to goods as opposed to services. And remember, the goods segment of the market did not fall, services did, which means that government money, directly and indirectly, supports not struggling small businesses in the service sector, but rather the Amazons of the world.

This is not a criticism — this is just the way it is, given the very specific nature of this crisis.

Another interesting abnormality here is consumer spending. We estimate that about 70% to 80% of the decline in consumer spending is done among or by high-income individuals. Now, if you think about it for a second, it does make sense because low-income Canadians spend most of the money — government money or their money —on necessities like rent and food. The most significant decline in spending is happening among high-income Canadians. This, of course, has major implications.

For example, if you’re a small business tailoring to high-income Canadians, your business is going down faster than a small business that is tailoring to low-income Canadians. And that’s exactly what we see in high-frequency data, both in Canada and the U.S. Something that we have never seen before.

It also means that income in Canada, because of government support and because of the fact that the vast majority of households did not lose their job, income is actually rising. This is the first recession ever that income is rising. Not only is it rising, it is rising at the fastest rate ever, which means that you have income rising, [even with] consumption going down. That’s why the savings rate is rising.

We estimate that today Canadians are sitting on no less than $90 billion of extra cash, sitting on the sidelines in deposit and checking accounts, looking for direction. Eventually this money will be utilized. I believe that in the second half of 2021, when we start to see the light, you will see a very aggressive utilization of this cash because there is so much pent-up demand.

One of the reasons why we believe that the second half of 2021 will be very strong, economically speaking: this cash is now sitting there collecting nothing. It will be there during the winter and then it will be released into the economy at a very aggressive way, supporting economic growth of about 5% to 6% in the second half of 2021.

Given the abnormality of the recession, clearly government policies here are very, very needed. However, we have to make sure that we are smart about that. The Canadian government is spending more than any other OECD country relative to the size of our economy. Our budget deficit is now approaching $350 billion. The debt to GDP ratio went up from 30% to 50%. There is a limit to how much we can spend. We see a situation in which the increase in income reflects, to an extent, a situation in which some people who were not supposed to be getting assistance, did get it. Same goes for businesses.

The hope is that the next wave of support would be much more targeted because we have to make sure that the system distinguishes between a 17 year old student that is not happy with his or her allowances and gets government support, and the 45 year old parent of two that is unemployed. This system must distinguish between the two scenarios.

At this point, that’s not the case and that’s why there is some leakage in the system and money is going where it’s not supposed to be going. We will pay the price later because this level of [government] debt is unsustainable and taxes will have to rise in order to compensate for that. In between, we have to make sure that government spending is much more targeted, and that’s extremely important given the very specific nature of this recession.