The CCP virus pandemic has forced Canadians to rein in their spending and start saving more, not unlike how traumatized Americans changed their habits after the financial crisis a decade ago.
But as economists and policy-makers strategize on how to restart the economy and return to growth, the biggest component—consumer spending—which accounts for roughly two-thirds of gross domestic product (GDP), doesn’t look like it will do its part.
Consumer spending estimates are in 1930s depression territory, according to Kip Beckman, principal economist at The Conference Board of Canada. He told The Epoch Times that The Conference Board estimates that consumer spending, adjusted for inflation, fell by 11 percent in the first quarter. It is projecting a further 32 percent drop in the second quarter.
A number of factors are working against consumer spending. Surging unemployment—over a million in March alone in Canada—is the biggest drag. Consumer confidence has fallen off a cliff and people are shutting their wallets.
In addition, the Bank of Canada said on April 15: “Household wealth has decreased due, in part, to the steep decline in stock markets. This is likely to prompt consumers to increase their precautionary savings and restrain their spending.”
In recent years, Canadians have been saving a lot less than they historically used to. The country’s household saving rate stood at 3 percent in the fourth quarter of 2019. It has been hovering between 1 percent and 3 percent since 2016 and is the lowest among the G7.
BMO says the median—or middle—annual savings rate since 1961 has been 5.5 percent, and that’s where Canadians’ new-found level of savings could be heading toward in the years ahead.
“The saving rate can reveal trends in precautionary savings, and that trend was low in Canada prior to the crisis and was on a secular downtrend since the early 1980s,” according to an April 17 BMO note. “At the very least, the crisis and sudden income losses may reinforce the need for precautionary savings among households.”
This is a drastic shift, but one that is not unexpected given recent U.S. experience. Prior to the 2008–09 recession that arose out of the U.S. subprime mortgage collapse, Americans were saving less than 3 percent of disposable income. But since 2014, they’ve been saving between 6 percent and 8 percent.
“This year we're looking for the savings rate to go up to 10 percent,” Beckman said regarding Canada.
While having a higher saving rate provides a cushion to prevent forced selling if something bad happens, in this case it’s not helpful for the economy since people are asked to stay home and can’t spend the way they used to.
Also, when the saving rate is low, more spending means increasing debt, which compounds a household’s sensitivity to a sudden loss of income.
According to Statistics Canada, there is a wide dispersion in savings between the wealthy and the poor, with the latter on average spending more than their incomes, but the average net saving for all Canadian households in 2018 was $852.
One thing Canadians are internationally known for is their indebtedness. The housing market bubble used to garner global headlines—mainly led by Vancouver and Toronto—and the Bank of Canada has long been wary of this inherent vulnerability in the Canadian financial system.
“I think one of the reasons why the savings rate went down so much here is because housing demand has been so strong but that's all changed now,” Beckman said. “We are looking for a change in behaviour.”
It’s difficult to paint all consumers with a broad brush, but some generalizations are being made given the greater desire for saving now. In addition to lower overall spending, BMO says households will tilt spending toward essentials and away from discretionary goods and services.
Reports out of China show that even though restaurants have reopened in some parts, people aren’t flocking to them. Consumers still have fear of catching the CCP (Chinese Communist Party) virus, commonly known as novel coronavirus, despite governments wanting to restart their economies.
Pertinent to Canada for how consumer spending and economic growth could pan out, Oxford Economics anticipates a gradual and uneven easing of social distancing measures through the summer such that U.S. GDP and consumer spending aren’t likely to return to their 2019 fourth-quarter level until the second half of 2021—about 18 months after the initial shock.
“Consumers’ downbeat views about future income prospects can restrain consumer spending and the overall recovery,” according to an April 28 Oxford Economics note about U.S. consumer confidence plunging to its worst level since June 2014.
The destruction of wealth in the stock market is especially harmful to boomers’ retirement nest eggs. Deutsche Bank notes that in the United States, people over 55 account for 40 percent of consumer spending, and that percentage has been steadily climbing since the start of the millennium.
No Inflation in Sight
Despite the record-setting stimulus from the government and Bank of Canada to support the economy, inflation is forecasted to remain low with anemic consumer spending being a primary reason.
“Forecasters expect consumer prices to increase by only 1.1 percent in 2020. The collapse in demand due to social distancing and plummeting commodity prices will restrain inflation over the near term,” Beckman wrote in a research note.
Restarting the economy involves getting businesses producing again, but consumer behaviour is less predictable and is not expected to rebound as vigorously as the supply side.
Results of an Axios/Ipsos survey published April 28 showed that out of all the options available to Americans for their government stimulus cheque, the largest percentage—38 percent—are saving it.
The face of consumer spending is changing amid the CCP virus pandemic. But in the long run, a higher level of savings that becomes entrenched would serve Canadian households and the economy well by making them more resilient.