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Royal Bank CEO Dave McKay is urging the federal not to overspend on new stimulus measures.

Frank Gunn/The Canadian Press

Royal Bank of Canada’s chief executive is warning the federal government not to overspend on new stimulus measures in its forthcoming budget and to hold back some fiscal capacity in case of unexpected setbacks to Canada’s economic recovery.

Hundreds of billions of dollars in cash have piled up in the bank accounts of Canadian consumers and businesses during the coronavirus pandemic. Even without new government spending, those savings will provide “a very significant primer to growth and recovery in the Canadian economy,” RBC CEO Dave McKay said on a conference call with reporters on Thursday.

Add an anticipated rise in disposable income as more people get back to work as public-health restrictions ease, as well as the Bank of Canada’s intention to keep interest rates at historic lows for some time, and there is significant unspent stimulus “already in the economy,” he said. That is driving fears about the prospect of rising inflation, which Mr. McKay predicts may start to show up before the end of next year.

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Canadians support Bank of Canada inflation targeting mandate

The Liberal government’s plan to spend between $70-billion and $100-billion over three years on stimulus measures was the big surprise of its economic statement in November. At the time, Finance Minister Chrystia Freeland said the details would be developed over the following months and announced in the 2021 budget, which has since been scheduled for April 19.

“This is a read-and-react situation, and I would counsel that we don’t want to overdo this. And some of the numbers that I’m hearing could be overstimulative,” Mr. McKay said. “Why not keep our powder dry and see how we recover, knowing that we’ve got this dry powder to interject quickly, as we’ve shown we can do in the past year if things aren’t playing out the way we hoped.”

Mr. McKay’s advice is in line with recent comments from a wide range of fiscal policy observers – including the International Monetary Fund, the C.D. Howe Institute and the Parliamentary Budget Officer – that have questioned whether Canada still needs a $100-billion stimulus program.

The savings sitting in Canadian bank accounts exceed even the most ambitious spending targets signalled by the government. Consumers have about $220-billion of cash on hand – about $180-billion more than is normal, and equal to about 10 per cent of Canada’s economy, Mr. McKay said. And there is more cash on companies’ balance sheets. In the U.S., equivalent deposits are closing in on US$1.8-trillion, representing a similarly large share of the economy.

“That’s just unprecedented. It’s almost 10 [times] what a consumer would normally carry through a cycle,” Mr. McKay said.

So far, spending among RBC clients hasn’t meaningfully picked up on key types of consumption such as travel, entertainment and dining, all of which were dramatically diminished in the pandemic. But as soon as those activities seem safe, “you’ll see strong, strong demand,” Mr. McKay said, “and you’ve got the cash to back it up.”

Rising consumer demand is set to collide with “persistent and concerning supply chain disruption” that is making some goods harder to get, Mr. McKay said. He cited examples including car maker Ford Motor Co. cutting production because of a shortage of semiconductor chips, a global inability to meet demand for new bicycles and a dearth of shipping containers to get goods to market.

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This combination of factors is stoking fears that inflation could spike, raising the prospect that central banks might be forced to act sooner than anticipated.

Neither banks nor economists can predict how much of the pent-up cash will be spent, and what proportion will be saved or invested. But even assuming that consumers strike a middle ground, RBC’s forecast points to economic growth rates “that start to get up closer to double digits” in percentage terms, Mr. McKay said. “We feel that the central banks will have to move the short end of the curve in the latter part of next year to start to address some of these pressures building up.”

CIBC CEO Victor Dodig predicts Canada will see episodic inflation in the short to medium-term.

DARRYL DYCK/The Canadian Press

In an interview this week, Canadian Imperial Bank of Commerce CEO Victor Dodig said he expects, “in the very short to medium-term, you’re going to have episodic inflation. You’re going to see it flare up in some sectors ... and then it may ebb again.” The bigger issue, he added, “is longer-term: How do we build an economy that actually has the capacity to grow?”

As far as the Liberal stimulus plan is concerned, the November economic update only provided a high-level description, promising that it would include “smart, time-limited investments” that would generate long-term improvements to Canada’s quality of life and competitiveness and a “green transformation” of the economy.

The government also said the scope and timing of the stimulus, including when it would be wound down, would be based on “fiscal guardrails” such as employment data.

Forecasts for Canada’s economic growth have improved considerably since then, largely because of the approval and distribution of COVID-19 vaccines. An April report by FocusEconomics found the average private sector forecast for Canada’s 2021 GDP growth was 5.4 per cent, compared with an average forecast of 4.5 per cent just three months earlier.

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Yet even as senior bankers and economists voice concerns, Ms. Freeland’s office has given no indication that the plan is being reconsidered. The minister’s spokesperson recently said that the risk of government doing too little outweighs the risk of doing too much.

A new twist in the stimulus discussion is the recently announced spending spree south of the border, as U.S. President Joe Biden revealed a US$2-trillion plan to jolt the economy with a heavy focus on infrastructure projects.

Bank of Nova Scotia chief economist Jean-François Perreault recently told the Globe that he suspects the Liberal government may decide to spend more than $100-billion on stimulus after seeing the scale of the Biden plan.

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