Recovering from ‘the most abnormal recession’

Predicting what 2021 will bring is no easy task, given the uneven nature of the current downturn.

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“This recession is the most abnormal recession in Canadian history,” said Ben Tal, managing director and deputy chief economist at CIBC, during a Nov. 18 interview. “It is abnormal because it’s asymmetrical on so many dimensions.”

One of the toughest challenges to overcome is the fact that the recession has been driven by weakness in the services sector rather than softness in the goods-producing segment, as with past declines. While some fiscal programs have been directed at propping up businesses, other emergency measures have been focused on ensuring Canadians can cover basic needs in the midst of the pandemic.

“[If] you follow the money, you see that most of the money that is being spent by Canadians goes to goods as opposed to services,” Tal said. “And remember, the goods segment of the market did not fall; services did. [That] means that government money, directly and indirectly, supports not struggling small businesses in the services sector, but rather the Amazons of the world.”

What complicates matters is the divide between how the pandemic is affecting low-income and wealthy Canadians in terms of employment, earnings, spending and saving habits.

Jobs numbers from October show employment growth slowed last month, with 83,600 jobs added in the month compared with 378,000 in September. Economists had expected 100,000 jobs to be added but, while there were gains in industries that included retail, there were also losses in the accommodation and food industries.

While the overall employment recovery since April has been faster than many expected, “high-touch” sectors such as accommodation and food services, where wages are lower, have been slower to rebound.

Even so, Tal said it’s high earners who have been spending less during the pandemic.

“We estimate that about 70% to 80% of the decline in consumer spending is done among or by high-income individuals,” he said.

“It does make sense because low-income Canadians spend most of the money — government money or their money —on necessities like rent and food,” he added, whereas high-income earners have cut down on discretionary spending due to lockdowns.

This has specifically hurt small businesses that cater to the wealthy segment, Tal noted, which is “something that we have never seen before” and which is occurring across North America.

One potential upside is “this is the first recession ever that [household] income is rising,” even while consumption is lagging. “That’s why the savings rate is rising,” particularly if you look at high-income earners, Tal said.

Despite all of these issues, which have curbed the effectiveness of fiscal stimulus designed to combat pandemic pressures, Tal is optimistic about the second half of 2021.

“We estimate that, today, Canadians are sitting on no less than $90 billion of extra cash, [which is] sitting on the sidelines in deposit and chequing accounts, looking for direction,” Tal said. “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.”

A recent CIBC report says that, between businesses and individuals combined, the amount of excess cash is likely around $170 billion. A separate report notes that a steep recovery may even be possible when a vaccine is delivered.

Tal expects that economic growth could hit 5% or 6% in late 2021. Domestic expansion slowed to real GDP growth of 1.2% in August, and expectations for the fourth quarter are depressed given second-wave hurdles.

For a recovery to occur, Tal said government assistance programs need to be refined.

While emergency benefits are “very, very needed,” he said, it’s also true 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,” with the debt-to-GDP ratio going from 30% to 50% and limiting how much the country can afford to spend.

If any Canadians who don’t need assistance are receiving it, he added, “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.”

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