A deputy governor at the Bank of Canada says higher-than-expected spending by households could help the country recover tens of thousands of lost jobs over the next two years.
Canadians have accumulated an average of $5,800 in extra savings as spending dropped over the last year while many businesses were closed or faced restrictions, and consumers became more hesitant about going out.
In a speech to Restaurants Canada, Bank of Canada deputy governor Lawrence Schembri says the fate of those dollars, and when and how they are spent, would affect the course of the economic recovery.
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If vaccinations roll out quickly, the Bank of Canada estimates an additional $4 billion quarterly could be pumped into the economy at the end of 2021 and early 2022 after broad immunity is achieved.
Schembri says the surge in spending would increase employment by about 30,000 more jobs on average annually over the next three years than the central bank previously projected.
That kind of turnaround could benefit the hardest-hit workers and businesses through the pandemic, he says, noting the thousands of restaurants that let staff go or closed for good as sales plummeted.
The savings are large enough to meaningfully affect the trajectory of the economy if more of it is spent over the course of this year and next, Schembri said.
“It does have the impact of bringing the recovery sooner,” Schembri told reporters after the speech.
CIBC senior economist Royce Mendes said the recovery could be pulled forward more if Canadians spent more on the hardest-hit sectors that have high domestic content.
“Fortunately, most of the hardest-hit sectors do have high domestic content, so they are one and the same,” he said.
The central bank on Wednesday held its key interest rate at 0.25 per cent, which is where it has been for almost one year.
Leading up to the decision, there were better than expected economic output figures for the last quarter of 2020, vaccine approvals made months earlier than expected, and a hot housing market that the bank noted warrants close monitoring lest it overheats.
Schembri said the domestic economy had more momentum at the start of the year than the bank previously anticipated, but the recent drop in employment figures and continuing uncertainty meant now wasn’t the time to raise rates.
“It’s going to take time for those people to get back into the labour force, so the recovery is going to progress relatively slowly,” Schembri said.
A report Thursday by the Organization for Economic Co-operation (OECD) projected the Canadian economy will grow 4.7 per cent in 2021, and four per cent in 2022.
The OECD report said that growth would bring the economy close to pre-crisis trends, drive down unemployment and likely mean core inflation will gradually pick up over the near-term. The report also flagged for attention how much faster Canada’s housing prices have climbed relative to its peers.
The organization said the Canadian economy is still going to require extraordinary monetary support, and said the federal government shouldn’t ease up on the aid.
“A high priority on fiscal support should remain while the economy is fragile. Crisis-related fiscal support can be withdrawn as the economy recovers,” the report said.
“Nevertheless, a clear and transparent road map for preventing a spiralling public debt burden is needed.”
The report said the government may have to consider a combination of spending cuts and tax increases, specifically on consumption taxes like the GST and a more aggressive rise in the carbon tax, to make federal finances sustainable once the crisis has passed.
The OECD recommended the government set specific measures for when to roll back stimulus, which is something the Liberals have said they plan to do, but have yet to detail.
The report also called for the government to set a specific debt-to-GDP target to keep fiscal decisions in check.