Amid draconian efforts to contain the spread of the novel coronavirus, the avalanche of pink slips stemming from the COVID-19 pandemic has only begun. Some economists predict job losses will be nearly three times greater than they were during the Great Recession of 2008-09, and Canada’s unemployment rate could reach 9 per cent by summer.
The jarring disruptions caused by COVID-19 threaten to send many Canadian households into financial tailspins. In that scenario, a crisis many policymakers hoped would cause just a sharp but brief economic interruption could morph into a more painful, long-lasting collapse in aggregate demand, reverberating long after pandemic control measures have ended.
Seeking to avoid that fate, the federal government has announced a series of aggressive interventions that amount to massive consumer bailouts. These include direct payments, wage subsidies, increased child benefits and delayed deadlines for filing tax returns. Officials are also encouraging lenders to allow struggling homeowners to defer mortgage payments and re-amortize loans.
Canadians’ resilience was last tested during the 2008-09 financial crisis. The vast majority of us passed, but we now appear to be much more vulnerable to economic shocks.
High debt loads have saddled a substantial minority of households with large monthly payments on mortgages, car loans and the like. And many families and individuals have no savings to fall back on.
“We are definitely more vulnerable than what we see in the U.S., and more vulnerable than where we were 10 years ago,” said Benjamin Tal, an economist with CIBC. “What masked this vulnerability, until now, was extremely low interest rates and a very strong labour market.”
Mr. Tal said that in the absence of any government intervention, he would expect consumer defaults on debt to climb by 50 to 70 per cent in the months ahead. If one accepts what Canadians say about their stretched finances in surveys and other studies, Ottawa’s aid won’t come quickly enough for nearly half the population.
Some experts who work closely with household financial data say the situation isn’t nearly so grim. But many of them agree that Ottawa needs to move quickly to cushion the economic impact of the crisis.
Personal finance gurus often recommend that consumers keep enough cash on hand to pay for at least three months of groceries, utilities and mortgage payments. Various surveys, however, suggest that a large proportion of the population has been either unable or unwilling to do that.
The Canadian Payroll Association has surveyed employed Canadians for many years and asked what proportion live paycheque to paycheque. The responses have always been alarming. Last year, the figure was 43 per cent.
Let that sink in. Then consider that nearly one in five respondents reported they probably couldn’t cobble together $2,000 should an emergency arise. And one quarter said it would be “difficult” or “extremely difficult” to meet their financial obligations if their paycheque were delayed by a single week.
Other studies corroborate those findings.
A 2018 survey by the Organization for Economic Co-operation and Development found that 40 per cent of people living in member countries were financially vulnerable. “If income were to suddenly stop, such people would not have enough ready assets to keep living above the poverty line for more than three months,” the report noted.
Canada’s figures were almost identical to the OECD average -- far better than some, such as Latvia and Greece, but much worse than South Korea and Japan.
In January 2019 survey, MNP Ltd., a national insolvency trustee, found that 46 per cent of Canadians were $200 or less away from being unable to pay their monthly bills. Citing that survey, Conservative Senator Larry Smith asked Finance Minister Bill Morneau last week why his government wasn’t getting money to Canadians sooner.
Such surveys all point to similar alarming conclusions, yet there are reasons to doubt them. If Canadians’ finances were truly so precarious, one would expect even minor economic downturns to prompt large surges in consumer insolvencies and bankruptcies. Yet even in Alberta, which has already endured several years of significant economic distress, just 0.5 per cent of mortgages are delinquent.
Philip Cross, a former chief economic analyst at Statistics Canada who is now a senior fellow at the Macdonald-Laurier Institute, has long been skeptical of income surveys. “I have no doubt that some people truly are living from paycheque to paycheque,” he said. “I just have a real problem with the idea that it’s nearly half of our society.”
In his more than three decades at Statistics Canada, Mr. Cross says he saw a consistent disconnect between what Canadians reported in surveys versus what was evident from tax data. Respondents tend to underestimate their income.
“Also, if people do get up to a precipice, they have access to more resources than they think,” he said. They can sell assets, for example, or turn to family and friends for help.
Scott Hannah, president of the Credit Counselling Society, a national non-profit based in Vancouver, said most visitors to his offices have options to avoid insolvency. “When it comes down to it, you can eliminate a lot of your wants and still cover most of your necessities,” he said.
Nevertheless, Mr. Hannah estimated that between a fifth and a quarter of Canadians actually do live paycheque to paycheque. The most vulnerable include those who haven’t had opportunities to set money aside for emergencies, particularly recent graduates and young families.
Adding to the financial vulnerability of Canadians are a cornucopia of monthly mortgage, car and credit card payments. Canadian households are now among the most heavily indebted relative to GDP among advanced economies, the International Monetary Fund (IMF) reports.
The problem is not so much that aggregate debt service costs have risen, but that during the past decade, much of the debt has become concentrated in highly vulnerable households. The main culprit in large cities is soaring house prices. Canadians have borrowed ever-increasing sums to acquire them.
The Bank of Canada and IMF, among many others, consistently cite high household debt among the gravest risks to the Canadian economy.
Ottawa responded by imposing stricter mortgage-financing requirements and higher interest rates, which have moderated debt growth in recent years.
Nevertheless, Bank of Canada senior deputy governor Carolyn Wilkins warned last November that in the event of a global economic slowdown, “indebted households facing a deteriorating financial situation would have to adjust their consumption more than they would have had to in the past.”
Having largely failed to discourage or restrain the increasing vulnerability of Canadian households, the Trudeau government is now attempting to cushion the consequences.
The good news, Mr. Tal said, is that unlike previous recessions, this one has an off-ramp: a vaccine targeting the coronavirus. Consumer demand hasn’t disappeared, it has merely been postponed. Laid-off employees won’t be polishing their resumes because they have jobs to return to. “Everything we are doing is simply buying time,” he said.
Just a few weeks in, the estimated cost of bailing out Canadian consumers and businesses has climbed from tens to hundreds of billions of dollars. Provided this support reaches vulnerable households in time, COVID-19′s legacy may not be widespread consumer insolvencies, but rather a ruinous blow to federal finances that could take years to repair.
Last Friday, the Parliamentary Budget Office presented a scenario under which the federal deficit would surge to $112.7 billion in 2020-21, or 5.2 per cent of GDP--a level not seen since the mid 1990s.
“Just two months ago, we were saying: ‘Do you really want to add $1 billion dollars more to the deficit? That’s terrible!’” said Mr. Tal. Now governments are scrambling to unveil measures that cost tens of billions of dollars each. "Are we going to pay for it from a long term perspective? Absolutely.”
In another time or place, such extreme measures might not have been so urgently needed. But that’s not the Canada we live in today.