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Canadians amassed a huge amount of additional savings last year, but the Bank of Canada expects only a portion of this to be spent in the coming years, tempering expectations for a consumer-driven recovery.

Household savings increased by $180-billion last year, or about $5,800 a person, as many Canadians spent less and pocketed generous support cheques from the federal government. These “forced” or “precautionary” savings could provide considerable preloaded stimulus for the economy if people turn on the spending taps later this year, Bank of Canada deputy governor Lawrence Schembri said in a speech on Thursday.

At the same time, a release of pent up household savings is not a sure thing, Mr. Schembri said. Most of the additional savings last year were the result of spending less on services such as hospitality, transportation and tourism. It’s unclear how much extra household savings can realistically be spent on meals, vacations and haircuts once COVID-19 immunization becomes widespread.

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“Comparisons are sometimes made with what happened during and after World War II. But during the war years, it was spending on durable goods – not services – that was suppressed. Such a dramatic reversal of spending is unlikely to occur now, since the purchase of goods has been much less restricted,” he said.

Mr. Schembri’s virtual speech to Restaurants Canada came a day after the Bank of Canada decided to leave its benchmark interest rate at 0.25 per cent and continue buying $4-billion worth of government of Canada bonds each week. The Wednesday rate decision walked a fine line between acknowledging that the Canadian economy made it through the second wave of the pandemic better than expected and continuing to warn of a protracted labour market recovery and uncertainty about the evolution of the virus that causes COVID-19.

“As we prepared for the decision, my colleagues on Governing Council spent a lot of time considering the signals in the latest economic data … [and] economic growth in the fourth quarter was stronger than anticipated,” he said.

“At the same time, Governing Council considered the recent rise in unemployment, the very uneven impacts of the job losses and the growth in long-term unemployment. There are now about twice as many job losses as there were at the height of the Great Recession a decade ago,” he added.

Much of Mr. Schembri’s speech focused on the bank’s outlook from the perspective of savings and potential spending.

Canadians on average spent around $4,000 less last year, largely because of reductions in “high-contact” service industries. Savings also increased as a drop in disposable income (around $1,600 on average) was more than offset by government support programs (around $3,400 per Canadian over the age of 15).

“There is much uncertainty about what Canadians will do with these savings. This is important because these savings are large enough to meaningfully affect the trajectory of the economy. If Canadians spend more than we expect, it would strengthen the recovery in consumption and employment,” Mr. Schembri said.

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Spending has rebounded much faster on goods such as cars, furniture and houses than on services. If people moderate their purchases of durable goods in favour of services, then aggregate spending will not necessarily take a large upswing.

A bank survey conducted in November found that only 5 per cent of respondents planned to spend most of their additional savings in 2021 and 2022, while another 14 per cent said they would spend some.

However, Mr. Schembri said, “a positive surprise could still occur if households in Canada continue to buy houses and goods at a similar pace as in recent quarters and also dip into savings to increase their spending on services.”

The Bank of Canada modelled a scenario where Canadians spend around 15 per cent of their additional savings, which would amount to about $25-billion worth of expenditure over the next three years. Much of this would likely go toward high-contact services, such as transportation, accommodation and restaurants, Mr. Schembri said. The bank estimates this additional spending could boost employment by about 30,000 jobs a year.

“That would essentially bring the recovery forward somewhat,” Mr. Schembri said in a news conference after the speech.

“I mean, $25-billion over three years is not a lot of additional spending, but it does have the impact of bringing the recovery sooner,” he said. He added that higher consumer spending is an upside risk to the bank’s economic forecast, and could result in the output gap – the difference between what the economy can produce and what it does produce – closing sooner than the bank predicted in January.

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