Remarks by Lawrence Schembri
Deputy Governor of the Bank of Canada
Restaurants Canada
March 11, 2021
Toronto, Ontario
(via Webcast)
COVID-19, savings and household
spending
Introduction
Good afternoon. I am grateful for the opportunity to speak to Restaurants
Canada once again. Your association represents more than 80,000 businesses
across our country and in normal times would employ more than one million
Everyone's life
people. But we are not living in normal times. has been disrupted
by the COVID-19 pandemic. Unfortunately, some families have suffered heavily,
experiencing severe illness and death.
The economic impacts of the pandemic have been very uneven, and your
industry has borne a heavy burden. Tens of thousands of jobs have been lost,
thousands of restaurants have closed, and others are struggling to survive. Many
restaurants have adapted with outdoor patios or pick-up and delivery. My family
and I are doing our part to help keep our favourites in business and our friends
who work there employed.
it's not the
But same, is it? For my family and many others, restaurants hold a
special place in our lives-that's where we celebrate special occasions. They are
where we make happy memories. So, we're all looking forward to spring and the
promise of better times ahead.
At the Bank of Canada, we recognize that Canadians count on us, and we are
doing our part to support Canadians. When the pandemic first struck, we
responded swiftly and aggressively. We cut our policy interest rate by
1.5 percentage points, to a record low. We also injected sufficient liquidity into
the financial system to ensure that Canadians could continue to borrow at low
interest rates. To further support the recovery, we committed to holding the policy
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rate at 0.25 percent until excess capacity in our economy is absorbed and the
inflation rate returns sustainably to our 2 percent target.
yesterday's
My purpose today is to explain the backdrop and the thinking behind
monetary policy decision. In doing so, I will highlight the key developments since
our last decision in January and how our views of the economy have evolved.
Like your business plans, our outlook is highly uncertain. It is conditional on the
evolution of the virus, especially the new variants, and the timing of the
vaccination rollout.
I will take a closer look at one of the risks around our outlook that we identified in
It's
our January Monetary Policy Report. one that matters to you: household
spending. And it may be stronger than we expected because of the accumulation
of personal savings over the past year.
Many Canadians lost their jobs and suffered financial hardship during the
pandemic. But others remained employed and have seen their savings rise for
two reasons. First, they have been unable to spend on a variety of high-contact
services, such as dining out, travelling or going to concerts. Second, they've
become more cautious about their health and finances. We estimate that these
"forced" and "precautionary"
savings add up to about $180 billion. There is much
uncertainty about what Canadians will do with these savings. This is important
because these savings are large enough to meaningfully affect the trajectory of
the economy. If Canadians spend more than we expect, it would strengthen the
recovery in consumption and employment.
I will also discuss some downside risks to our outlook, most of which are related
to the pandemic and its possible long-lasting effects.
Recent developments
Let me begin with a discussion of recent economic developments. In January, we
anticipated a slowing of growth in the near term because of the renewed
containment measures in Canada and elsewhere. But we also saw a more
positive outlook over the medium term. Vaccines had been approved several
months earlier than expected, allowing the potential for broad-based immunity to
be achieved as early as the end of 2021.
Economies outside Canada
Since January, the recovery in the global economy has been led by robust
growth in the United States. This US rebound reflects the limited impacts of
containment measures and ongoing fiscal support. And more fiscal support is on
the way.
Global and domestic financial conditions and market sentiment remain positive
as optimism continues to grow. Long-term bond yields have risen as the outlook
for the US economy has improved. For similar reasons, oil and other commodity
prices have continued to rise. The Canadian dollar has been relatively stable
against the US dollar but has appreciated against most other currencies.
The Canadian economy
Recent Canadian data indicate that the economy has been quite resilient.
Economic activity in the fourth quarter of 2020 and the first quarter of this year
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has been stronger than we anticipated in January. Consumer spending has been
less affected by the recent containment measures because people and
businesses have adapted to them. House construction and resale activity have
been robust, supported by low mortgage rates and a desire for more living space.
Stronger foreign demand and rising prices have boosted activity and exports in
the oil and gas, mining and manufacturing sectors. Business investment
intentions are also rising as confidence in the recovery has improved. In all, the
level of economic activity at the end of last year was almost 1 percent higher than
we had anticipated.
However, recent data tell a mixed story about the labour market, which remains a
long way from a full recovery. Job losses in December and January were sizable.
The losses were concentrated in Quebec and Ontario, in sectors most affected
by the restrictions and mainly among part-time positions. But employment was
resilient in some other sectors, surpassing levels seen before the pandemic.
The near-term inflation outlook has been revised up. We now expect that inflation
will move temporarily above our 2 percent target in the coming months, to around
the top of the 1 to 3 percent control range. That reflects rising prices for gasoline,
combined with adjustments from the prices of numerous goods and services that
fell sharply when the pandemic struck a year ago. We then expect inflation to
moderate, given excess capacity in the economy.
Accumulated savings and consumption
Let's now turn to
the impacts of the pandemic on income, spending and savings.
The virus caused unprecedented losses in jobs and labour income. It also
reduced household spending. However, extraordinary fiscal support more than
offset these income losses, so on balance, household income increased. When
you couple this increase with the drop in spending, household savings rose
dramatically.
This outcome may seem puzzling, but the story behind it largely rests on the
pandemic's Let's look first at the
uneven impact across sectors and workers.
impact on labour income. About three million jobs disappeared between February
and April 2020. High-contact sectors-primarily services-as well as the
lowwage workers employed in these sectors-primarily women and youth-were the
hardest hit. Jobs for workers earning less than $16 an hour fell 27 percent in
2020, almost five times the decline in overall employment. Together, the
hospitality and retail trade sectors explain 30 percent of the shortfall in
employment income, while less than 10 percent can be attributed to sectors at
the top of the wage scale (Chart 1).
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Chart 1: Losses in labour income in 2020 occurred primarily in low-wage sectors
Share of the total loss in compensation of employees per sector by wage quintiles
Retail trade
Accommodation and food services
Low-wage sectors
30%
16.9 13.0
(1st quintile)
Info, culture
Wholesale trade and recreation
2nd quintile 26%
8.6
7.6
Durable Non-durable
manufacturing
manufacturing
Middle-wage sectors
15.2 3.0
20%
(3rd quintile)
Health
Educational
care Construction services
4th quintile
12.9 3.4
16%
Mining and oil and
gas extraction
High-wage sectors
3.9 3.0
8%
(5th quintile)
Public sector
-10 -5 0 5 10 15 20 25 30 35
%
Note: Wage quintiles are based on the Labour Force Survey data for 2019. A negative value indicates a gain in income over
2020 compared with a linear trend (2016-19).
Sources: Statistics Canada and Bank of Canada calculations
In terms of dollars, Canadians lost an average of $1,600 in labour income over
2020, and low-wage workers suffered much of these losses (Chart 2). However,
the drop in household disposable income was more than offset by the
government support programs. Combined, the direct fiscal support to households
amounted to about $105 billion, or $3,400 per Canadian aged 15 or older.1
Lowwage workers collected a large portion of these transfers. In sum, the disposable
income of the average Canadian rose by an additional $1,800 in 2020.
1
The main income support measures were the Canada Emergency Response Benefit
($88.9 billion), the Canada Emergency Student Benefit and the Canada Student Service Grant
($3 billion), one-time federal transfer payments ($10.5 billion; e.g., goods and services tax credit)
and provincial special transfers ($3.4 billion). Workers' incomes were also supported indirectly by
the $62 billion paid to firms through the Canada Emergency Wage Subsidy.
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Chart 2: Fiscal transfers more than offset labour income losses in 2020
(nominal)
Income and government transfers per capita
Total income*
-$1,603
Government transfers†
$3,410
Disposable income‡
$1,807
-2,000 -1,500 -1,000 -500 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
Dollars
Note: These figures represent the average per capita (population aged 15 and older) gap between a linear trend (2016-19)
and actual data in 2020.
*
Total income equals primary income minus current transfers paid.
†
Government transfers equals current transfers received.
‡
Diposable income equals total income plus government transfers.
Sources: Statistics Canada and Bank of Canada calculations
While disposable income increased, the impact of the pandemic on household
spending was even greater. Canadians, on average, spent about $4,000 less in
2020 because of the pandemic. Lockdown measures and fear of the virus kept
wallets shut (Chart 3).2
To analyze this further, we can divide spending into four categories: essentials
(such as food and clothing), non-essentials (such as cars and other durable
goods), hard-to-distance items (primarily services such as travel) and shelter.3
Hard-to-distance items represented more than half of the decline in spending,
which reflected a significant reduction in sales at restaurants, bars and hotels.
I know many of you felt this acutely.
2
The weakness in spending was mostly due to services consumption (about 75 percent).
3
The consumption categories are based on those used in J. MacGee, T. M. Pugh and K. See,
"The Heterogeneous Effects of COVID-19 on Canadian Household Consumption, Debt and
Savings," Bank of Canada Staff Working Paper No.
2020-51 (November 2020).
includes groceries, clothing and medical products as well as urban transit, education,
Essentials
communication and financial services. Non-essentials include vehicles, appliances and jewelry.
includes food and beverage services as well as accommodation
Hard-to-distance (hospitality)
services. Hard-to-distance (others) includes recreational, cultural and transportation services as
well as travel expenditures by Canadians abroad. Shelter includes spending related to the
ownership, rental or maintenance of a dwelling.
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This drop in spending was greatest in the second quarter of 2020, when the
lockdowns were widespread and stringent. In the second half of the year, as
restrictions were relaxed, spending rebounded. The strength came primarily in
non-essential goods such as motor vehicles, recreational goods and furniture, as
people spent more time outdoors and activity in the housing market picked up.
However, spending on high-contact services barely moved.
Chart 3: Canadians spent on average $4,000 less in 2020
Gap between actual per capita consumption and a linear trend
(quarterly data are nominal and seasonally adjusted at annual rate)
Dollars
1,000
-$3,980
0
-$1,153
-1,000
-$778
-2,000
-$1,306
-3,000
-$877
-4,000
2020
-5,000
-6,000
-7,000
-8,000
-9,000
2020 Q1 2020 Q2 2020 Q3 2020 Q4
Hard-to-distance (hospitality)
Hard-to-distance (other; e.g., transport and recreational services)
Non-essentials (e.g., durable goods)
Essentials (e.g., food and clothing)
Shelter (e.g., maintenance and repair of dwelling)
Consumption
Note: These figures represent the per capita (population aged 15 and older) gap between a linear trend (2016-19) and actual
nominal consumption in 2020.
Sources: Statistics Canada and Bank of Canada calculations
To summarize, these sizable shifts in income and spending resulted in an
unprecedented increase in savings in 2020 of about $180 billion, or roughly
$5,800 per Canadian (Chart 4).
Bank research suggests about 40 percent of the extra savings was accumulated
by high-income households. Their incomes were less affected, and they typically
spend relatively more on non-essential and hard-to-distance items. On the other
hand, low-income households accumulated less than 10 percent of the savings.4
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Chart 4: Canadians accumulated on average $5,800 in extra savings by the end of
2020, mostly by high-income households
Extra savings per capita (seasonally adjusted) and share of accumulated savings per income quintiles
Dollars
6,500
6,000
5,500
9.2%
5,000
$1,807
13.3%
4,500
quintiles
4,000
17.6%
$1,545
3,500
3,000
income
$1,055
22.7%
2,500
by
2,000
$3,980
$3,083
1,500
savings
$2,278
37.2%
1,000
500
Extra
$337
0
2020 Q1 2020 Q2 2020 Q3 2020 Q4
Spendings shortfall Disposable income gains
Sources: Statistics Canada and Bank of Canada calculations
What have the savings been used for, so far?
It seems that most of the extra savings is sitting in bank accounts. The total value
of personal deposits in banks increased by $150 billion between February and
December 2020.5 This exceeded the average pace at which deposits have been
increasing over the past decade by about $100 billion.6
usual because of the pandemic, compared with only 20 percent for households earning less than
$40,000.
5
Statistics Canada Table: 10-10-0116, vector: V41552791
6
If deposits had kept growing at their trend growth following the global financial crisis, they would
have increased by only $50 billion from February to December. Therefore, deposits increased by
$100 billion more than the historical trend would have predicted.
- 8 -
How about the rest of these savings? Evidence from survey responses and credit
data indicate that some have been used to pay down debt.7 Given the strength in
housing market activity since the summer, some have been used to purchase
houses, likely by higher-income earners. Similarly, some have probably been
used to purchase financial assets, such as mutual funds or guaranteed
investment certificates, perhaps for a registered retirement savings plan or a
taxfree savings account.
The extraordinary size and nature of these savings-and their potential impact if
spent-have sparked much debate. To get at this uncertainty, we added
the Bank's Canadian Survey of Consumer
questions to Expectations. In the
November survey, only 5 percent of respondents said they plan on spending
most of these savings in 2021 and 2022. Another 14 percent plan on spending
some. Based on these responses and evidence from other surveys, we assumed
in our January projection that households would not dip into these savings.
Instead, we expected that their savings rate would decline from a peak of
27.5 percent in the second quarter of 2020 to below 4 percent by the end of
2023, as the need for precautionary savings faded.
However, a positive surprise to spending is possible, especially if the virus is
Let's
brought under control and household confidence improves. now consider
the potential impact of households drawing down on their savings for
consumption.
Macroeconomic consequences of a savings drawdown for consumption
We can start by thinking about how much would be spent on goods and services
and over what time horizon.
As with many things related to this pandemic, this buildup of savings is unique
because it stems primarily from a dramatic decline in spending on services. So, it
is not clear how much of past shortfalls will be made up. I am not going to get
more frequent haircuts, but my family might initially want to eat out more often,
take an extra vacation or buy a new television.
Comparisons are sometimes made with what happened during and after World
War II. But during the war years, it was spending on durable goods-not
services-that was supressed. Such a dramatic reversal of spending is unlikely
to occur now since the purchase of goods has been much less restricted.
A positive surprise could still occur if households in Canada continue to buy
houses and goods at a similar pace as in recent quarters and also dip into
savings to increase their spending on services.
To illustrate the possible economic impact of a drawdown in savings, we consider
a scenario in which certain goods and services could experience
higher-thannormal spending because of the release of pent-up demand. In this scenario, we
assume that households would spend about $25 billion, or approximately
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15 percent of these savings. We based this figure on the estimated propensities
to consume out of these savings by type of good or service and by income.
We can't be sure about the because we don't know
time horizon for this spending
when life will return to normal. We assume that households will spread their
additional spending over the period starting in the second quarter of 2021 to the
end of 2023. Spending is assumed to rise over 2021 and then be concentrated in
late 2021 and early 2022, after broad immunity is achieved.
In this scenario, the recovery in household consumption is brought forward.
Nominal household spending growth in 2021 would rise from 4.3 percent-which
we projected in January-to 5.0 percent. At the peak, spending would increase at
an annual pace of roughly $500 per Canadian over the last quarter of 2021
That is equal to an additional $4 billion being added into the economy
(Chart 5).
in that quarter alone. We estimate that much of the extra savings would be spent
on high-contact services, including transportation, accommodation, and food
services. Because the demand for labour would increase, we estimate that
employment would rise by more than we had projected-by about 30,000 jobs,
on average-each year over the next three years, with a peak increase of
40,000 jobs in 2022. Such a boost in demand and employment would greatly
benefit the businesses and workers, such as yours, who have suffered the most
during this crisis.
Chart 5: At peak, the boost to consumption per capita would be $500 in 2021Q4
a. Total consumption b. Hard-to-distance-Hospitality
Per capita, nominal and seasonally adjusted at annual rate
Per capita, nominal and seasonally adjusted at annual rate
Dollars
Dollars
50,000 3,000
2,600
45,000
2,200
1,800
40,000
1,400
1,000
35,000
2019 2020 2021 2022 2023
2019 2020 2021 2022 2023
Baseline-January MPR Upside risk Baseline-January MPR Upside risk
Note: MPR is the Monetrary Policy Report.
Note: MPR is the Monetrary Policy Report.
Sources: Statistics Canada and Bank of Canada calculations
Sources: Statistics Canada and Bank of Canada calculations
Key downside risks
While it is a useful exercise to assess the potential effects on households dipping
into their accumulated savings, this positive surprise is not guaranteed. There are
also important downside risks. In January, we identified a few key risks that are
still relevant.
In particular, in the near term, there is the risk of another wave of infections and
lockdowns as more contagious variants spread, the rollout of the vaccines is
delayed, or the vaccines are less effective against the variants.
Over the medium term, businesses may face increasing financial stress. We
could see more firms close as the recovery progresses slowly and our economy
restructures in response to more persistent shifts in behaviour. For example, the
post-pandemic world will likely see more people working from home and
shopping online. This could reduce the demand for office and retail space and
related services in downtown areas. Consequently, more businesses could
permanently shut their doors and let employees go.
There are about 850,000 fewer jobs now than a year ago, and the ranks of the
long-term unemployed are increasing. Prolonged spells of unemployment could
workers'
erode skills and make it more difficult for them to find a job.8
While new firms may be established and workers retrained, this will take time.
Monetary policy stimulus will be needed for an extended period to mitigate these
risks and support both the restructuring and recovery of our economy.
Our decision
all of this fed into the Bank's interest rate decision
So, let me now turn to how
yesterday.
As we prepared for the decision, my colleagues on Governing Council spent a lot
of time considering the signals in the latest economic data. While the
unemployment rate remains elevated, economic growth in the fourth quarter was
stronger than anticipated. So, the Canadian economy had more momentum at
the start of the year than we had anticipated. Therefore, we are no longer
expecting the economy to shrink during the first quarter. Housing construction
and resale activity has been particularly strong. We noted the large house price
increases in some markets that will warrant close monitoring for speculative
activity. Improving foreign demand, mostly from the United States, and higher oil
and other commodity prices are positive signs that raise the prospects of
stronger export growth and a rebound in investment.
At the same time, Governing Council considered the recent rise in
unemployment, the very uneven impacts of the job losses and the growth in
longterm unemployment. There are now about twice as many job losses as there
were at the height of the Great Recession a decade ago. It will take some time
for the labour market to recoup these losses, given that the economy will be
restructuring as it recovers. One issue we discussed is the impact of this
restructuring on economic capacity. We will be exploring the issue of capacity
Monetary Policy Report
further in our next in April.
We also talked a lot about the high levels of uncertainty around the outlook
stemming from the risk of the spread of new variants of the virus and the
possibility of outbreaks that could lead to renewed containment measures.
We also discussed the outlook for inflation, which we expect will move to around
the top of the band in the next few months. But this increase will not be
sustained. As base-year effects dissipate, the large amount of slack in the
economy should cause inflation to moderate.
Ultimately, Governing Council decided that the economy still requires
extraordinary support from our monetary policy. We reaffirmed our commitment
to keep our key policy rate at a record low 0.25 percent until economic slack is
absorbed, so inflation can return sustainably to its 2 percent target. In our
January forecast, we projected this would not happen until into 2023. We will
update our forecast in April.
We also agreed to maintain our program of government bond purchases at its
current pace of $4 billion a week. As we continue to gain confidence in the
strength of the recovery, the pace of net purchases of Government of Canada
bonds will be adjusted as required.
I hope this gives you a sense of our decision-making process. In closing, let me
stress that the Bank of Canada will remain committed to providing the
appropriate degree of monetary policy stimulus to support the recovery and
achieve our inflation objective. We will do our part to help Canadians get beyond
And I can't wait for the day when I join my family and friends at a
COVID-19.
restaurant, raise a glass and toast the end of the pandemic. That day is coming,
hopefully soon.