Canadian Economic Cliff At The End of Pandemic Support Is Unlikely: National Bank

The economic cliff many are worried about when pandemic support is withdrawn may not be so bad. That’s the take from National Bank of Canada (NBC) economists Matthieu Arseneau and Alexandra Ducharme. The “big six” economists crunched the numbers on disposable income, minus pandemic support. Disposable income has already resumed the pre-pandemic growth trendline. Throw in a reopened economy with pent-up savings, and they see an economic cliff as unlikely.

Canada Is Gradually Withdrawing Pandemic Supports In The Coming Weeks

Many of the generous supports Canada extended during the pandemic are coming to an end. Amongst them, the bank highlights two of the biggest: the Emergency Wage Subsidy, which ends in June; and the Canada Recovery Benefit, which ends in September. Unless extensions are announced, many fear this can be a setback to the recovery. The NBC analysts don’t see it that way.

Disposable income received a very large boost due to pandemic support. In fact, pandemic support exceeded the amount of income lost. This helped boost consumption, and prevent people from hoarding cash. The latter being important since it could have resulted in a deflationary spiral. Withdrawing the supports will definitely cause disposable income to fall. However, disposable income has since rebounded, retracing the ground lost.

Canadian Disposable Income Has Recovered To The Pre-Pandemic Trend

Now may be the ideal time to withdraw some of these supports — at least from the economy’s perspective. Disposable income ex-pandemic support is now above the pre-pandemic trendline. It managed to do that with the economy just partially reopened.

Canadian Annualized Disposable Income

Canadian household income with and without government COVID-19 support. 

Source: NBC Economics. 

“The economic accounts data published in early June offers compelling evidence against the fiscal cliff scenario,” wrote the economists in an email. “Disposable income excluding government programs related to the COVID-19 was already back on its historical trend as of Q1.” 

Reopening of The Economy and Savings Boost The Outlook 

The reopening of the economy should offset the loss of support as well. Summer job hiring, as well as returning service and tourism, will lead to a boost in economic activity. “Looking ahead, an easing of sanitary measures should lead to substantial job gains this summer and keep disposable income on an uptrend,” they said.  

Many people will also part ways with the war chest of savings they accumulated. Elevated savings during the pandemic might result in pent-up spending. An extra dinner here, and some travel there isn’t an outrageous assumption.

“This combined with the 9.5% excess savings already accumulated by households mean that consumption is on strong footing over the next few quarters,” they said.

All of this is great, as long as you’re only viewing the economy in aggregate — like an investor or politician. Disposable income is back to where it should have been, but employment isn’t even close to pre-pandemic levels. Essentially some households more than made up the income lost by the unemployed households.

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