By now we’re all too familiar with the litany of misery that was the second quarter of 2020, a period that will go down in history as The Lost Quarter: when the government threw the “off” switch on the economy and sent almost everyone home.
The ugly scars are all over the economic data. An 11.5-per-cent plunge in gross domestic product, the worst quarter-to-quarter decline ever recorded. Millions of Canadians out of work. A more than doubling of the unemployment rate from its prepandemic level.
Yet amid the statistical tale of woe comes something quite head-spinning. Canadians’ incomes actually grew. A lot.
Details contained in last Friday’s quarterly gross domestic product report reveal that household disposable incomes surged nearly 11 per cent in the second quarter. This remarkable spike came at the same time as household spending plunged nearly 14 per cent – a product of sweeping retail closings, mortgage deferrals and the general bunker mentality that took hold for a couple of months there. The combination sent the national saving rate soaring: An astounding 28 per cent of the country’s incomes went unspent in the quarter. (The pre-COVID-19 norm was more like 3 per cent.)
Where did this surprising income explosion come from? Certainly not wages, which tumbled almost 9 per cent, a record, amid widespread job losses, reduced hours and temporary furloughs. But the federal government’s crisis income supports – chiefly, the Canadian Emergency Response Benefit (CERB) – more than filled that income hole. The country’s households lost a combined $21-billion in employment compensation in the quarter, but they gained $54-billion in government transfers.
What this tells us is that the government response to the COVID-19 crisis has gone substantially beyond one of its primary goals, that being to replace the income lost to lockdowns and other virus-containment measures. Ottawa isn’t just leaning against wage losses, it has leaned far beyond them, substantially juicing the consumer pocketbook.
This all suggests that there is, indeed, ample room for Ottawa to unwind its support programs without putting the economic recovery, and the health of Canadian consumers, at risk. Frankly, the numbers suggest that Canadians, collectively, don’t need the degree of bailout that Ottawa has provided them; if they couldn’t stand on their own feet a couple of months ago, it certainly looks as if they are well funded to do so now. Ottawa has effectively provided a pretty substantial mound of savings – whether it’s to help see consumers through a second wave of the crisis, or to supply ready spending fuel for the recovery.
The early evidence of the economic bounce-back – employment up 1.4 million in June and July; GDP up an estimated 10 per cent over the same period; retail sales surpassing pre-COVID levels – indicates that the initial rebound has been faster and stronger than many experts had anticipated. The government’s massive injection of funds has certainly contributed to that. As the economy has reopened, the income supports have moved away from serving emergency needs to, increasingly, acting as economic stimulus.
A key question for the government, in light of the data, is what its stimulus spending should look like – since that is what its COVID response has become. It needs to take a hard look at how much stimulus is needed, and where to direct it. The economic issues of the next few months look quite different from those of the past few.
The government is poised to extend income supports, in the form of a post-CERB plan that would be considerably more generous and inclusive than the existing Employment Insurance benefits. Perhaps it’s a good investment, at least over the relatively near term, as another major source for the surge in savings – the mortgage deferral program – is coming to an end; those most at risk of default would continue to have a safety net.
The consumer would also seem to be the path of least resistance to an economic rebound; the uncertain global climate poses some pretty daunting barriers to stimulating business investment and trade, for example. And the income benefits are popular with voters, something a minority government, facing the possibility of an approaching non-confidence vote when Parliament resumes, isn’t likely to overlook.
Still, a consumer-driven recovery comes with pitfalls, as Canada discovered in the years after the 2008-09 global financial crisis. Ottawa could unwittingly fuel another wave of housing inflation and household debt.
With the Bank of Canada’s interest rates near zero and the data showing that the household sector was essentially oversupported in the crisis, those are already risks without further help from the government. Perhaps this is an area where Ottawa not only could, but should, take its foot off the gas pedal.
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