Life after the vaccine: stimulus, savings, and spending
Part two of a five-part series
By Scott Lacombe, CFA 19 May 2021 7 min read
Written by Scott Lacombe, CFA and co-authored by Alex Richards, CFA.
The COVID-19 pandemic has resulted in some significant changes in our daily lives. Working from home for many became the norm out of necessity. The recession experienced in 2020 was atypical in that it was not an economic driven recession, but rather a recession that resulted from a health crisis and mandated lockdowns. Much of the job and wage loss that occurred was countered by sweeping federal and monetary stimulus that, for many, led to increased savings and wages for the year. The vaccines that are being doled out en masse have brought about an anticipation of life returning to normal. The potential reopening of the economy later this year could open the floodgates in terms of consumption spending, and there are questions on what that might mean for inflation, interest rates, and the broader economy.
Let’s take a look at anticipated economic and government changes and what this all means for individuals.
Government changes brought on by pandemic
The recession induced by the government-mandated shutdowns was met with a variety of fiscal and monetary support, which was a significant policy shift from earlier recessions. Previously, governments would react with a variety of measures, including direct fiscal stimulus programs or encouraging business spending through tax measures. This time was different, as governments focused on an incredibly swift delivery of several income supports and programs. These programs were introduced to help offset the economic impact of shutdowns that were put in place to contain the pandemic, and were essential in preventing a catastrophic contraction in economic activity.
In Canada, the Canadian Emergency Response Benefit (CERB) was introduced alongside expanded Employment Insurance benefits. A variety of similar supports were introduced worldwide, including one-time stimulus cheques in the US, other income supports, eviction restrictions and payment holidays. Central banks were also very quick to respond, announcing their commitment to ensuring normal financial market operations through massive bond buying programs and drastically cutting short-term interest rates. Cutting the short-term rates can help make consumer debt repayments more manageable.
The aggressive, quantitative easing (QE) actions from central banks injected roughly $8.5 trillion into the market, mostly in the form of bond buying programs pushing bond yields down to historical lows. As the prospects for the economy improve and markets regain stability, central banks have slowed their stimulus. They remain committed to maintaining confidence in markets through further easing. Central banks have signalled their tolerance for heightened inflation and, most notably, the US Federal Reserve (the Fed) has stated it is willing to let inflation run above its two per cent target. This likely indicates that the Fed is unwilling to raise interest rates until inflation is two per cent for a meaningful period of time. If inflation starts to get too high for comfort, it wouldn’t be surprising if interest rates are raised very slowly. In 2013, the Fed announced plans to taper its QE program off eventually, and it was this announcement alone—not even the action of doing so—that caused turmoil in the bond market. This was referred to as the ‘taper tantrum’ and there were concerns that it would spill over into equity markets and, eventually, affect economic growth. Fortunately, that did not happen and the S&P 500 gained roughly 30 per cent in 2013. It’s reasonable to assume that the Fed is looking to avoid another taper tantrum scenario, so it’s likely they’re going to tread even more lightly this time around.
As we recover from the pandemic, governments are going to have to switch from survival mode into recovery, and eventually growth mode. This means that post pandemic there will be more stimulus packages, likely in the form of traditional stimulus. Rather than government cheques and income support, we would see more infrastructure spending and investment in the country. The US has already started this, with the Biden administration announcing a mammoth $2 trillion stimulus plan; focusing on transportation and communications systems. The Canadian government has also announced a $100 billion plan in its upcoming 2021 budget for post-pandemic stimulus. Other countries worldwide are likely to follow suit, especially as vaccination rates increase and economies properly re-open without the overhang of another possible lockdown.
Savings and employment - economic changes from the pandemic
Recessions typically result in elevated unemployment that is distributed across all sectors as well as an overall decline in incomes. Intuitively this makes sense. If we look at what transpired in 2020, due to the mandated shutdowns, the hospitality and recreation industries accounted for more than 25 per cent of jobs lost in Canada. Industries able to adapt to working from home experienced modest declines in employment. These points can be viewed positively from an economic standpoint, as many of the jobs lost are likely easily regained once economies are able to operate normally. Since the onset of the pandemic, we have seen recoveries in the initial jobs lost and, with economies reopening as vaccines are rolled out, the trend is expected to continue.
Year-over-year hourly wage change
The recovery in certain jobs, combined with unprecedented government support programs, has resulted in year-over-year wage levels increasing at historically high rates (Source Bloomberg). From March 2020 to the beginning of October 2020, the Canadian government disbursed just over $81.6 billion in the form of CERB and EI payments. Looking back to the 2008 global financial crisis, the most the government had paid out over a 12-month period was just over $19 billion ($23 billion with inflation)1.
It’s clear that the removal of government support programs will have a profound impact on the economy, especially if people are not weaned off gradually. It’s difficult to assess the overall impact, as government payments tend to have a multiplier effect on economic output, but at just under four per cent of GDP, it certainly will be significant. It wouldn’t be surprising to see wages decrease, or at least increase very minimally for a period of time, as those programs wind down. That being said, these increased income levels have helped usher in a great increase in the savings rate for a large percentage of the economy. On the flip side, we also know there is a section of the economy that has struggled desperately during this pandemic.
The increase in household savings, which could be viewed as one seemingly positive outcome of the pandemic, reached levels never before seen. Based on the historical average, it can be estimated that there is around $1.2 trillion in excess savings currently held by households in the US as of the end of February 2021. Although Canada’s excess household savings are dwarfed by the US numbers, they are similar on a per capita basis at about $3,676 per person2. We can put Canadian savings into perspective by comparing the growth in deposits versus loans at Canadian chartered banks. Deposits and loans grew in tandem until the pandemic hit, when Canadians stopped spending as much money. With people having fewer reasons to borrow money, the gap in deposits and loans grew to roughly $164 billion by the end of March 2021.
Canadian chartered bank deposits and loan growth to the end of February 2021
While savings rates have fallen since their peak mid-pandemic, the amount of excess savings is still at historical levels, signalling much pent up demand. The question now is, what are people spending their money on? A report from J.P. Morgan3 suggests that people are spending more of their money online on things like groceries and cleaning supplies, at the expense of cosmetics and skin care products.
Given historical savings levels, it’s likely that people will splurge and spend their excess savings to a certain extent, giving the economy another boost. Using a baseline of 2019 Opentable data, restaurant bookings in Canada dropped nearly 58 per cent in February 2021, compared to only a four per cent decline in February 2020. Using this change in restaurant bookings as an indication of the level of spending on other discretionary activities, there is still a lot more money to be spent4.
So how long will this trend last? Well, it depends, but it's likely that people are going to have less money in the next 18 months, as savings are spent down and incomes normalize. It’s going to be very important for governments to balance pandemic-induced support, post-pandemic stimulus and economic growth, otherwise there may be the unintended consequence of a decline in economic activity.
While it may seem like everything recently is “unprecedented” or reaching “historical” highs or lows, it cannot be forgotten that the level of spending and direct support we are seeing by governments is unlikely to continue in the same way. At the same time, it’s important to remember that recessions like the pandemic-induced downturn are also atypical. Recessions are not generally going to result in high double digit unemployment or huge swings in GDP growth.
Some aspects of our lives that have changed as a result of the pandemic will likely remain changed, such as working from home and further enhancing our virtual capabilities. Looking into the future, it’s vital not to lose sight of what is considered ‘normal’ and to keep our expectations, good or bad, realistic.
1Statistics Canada. Table 14-10-0007-01 Employment insurance benefit characteristics by class of worker, monthly, unadjusted for seasonality
3How COVID–19 Has Transformed Consumer Spending Habits
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