Household consumption in a pandemic

Deputy Governor Lawrence Schembri talks about how COVID-19 has affected household saving and spending patterns and discusses the Bank’s decision yesterday to leave the policy rate unchanged.

Watch Deputy Governor Schembri speak to Restaurants Canada via webcast. Read the full speech.

Policy rate unchanged

We decided to leave the policy interest rate at 0.25 percent.

Recent developments are encouraging

The Canadian economy has been resilient over the past few months despite recent containment measures. Businesses and consumers have largely been able to adapt to them, and the housing market has been robust.

But job losses continued to affect many people in December and January—primarily in Ontario and Quebec. Fortunately, individuals and businesses most affected by the lockdowns have benefited from an unprecedented level of fiscal support. This helped offset a sharp drop in labour income.

Household savings have risen

On average Canadians spent about $4,000 less last year, largely because:

  • many high-contact services such as travel and entertainment have been shut down
  • people are being more cautious about both their finances and their health

As a result, household savings have risen across the country to the tune of $180 billion in the past year, or roughly $5,800 per Canadian.

Overall, the impacts of COVID-19 have been uneven—including those on household savings. We’ve seen heavy job losses in high-contact sectors with lower wages where the employees are often women and youth. Similarly, low-income households represent only a 10 percent share of the extra savings.

What people might do with extra cash

Right now, with most of the extra savings, it seems people are:

  • saving them as deposits in personal bank accounts
  • paying down debt
  • buying financial assets such as mutual funds and registered retirement savings plans

Strong activity in the housing market suggests some people are also trading up for more space.

If the pandemic is brought under control and households become more confident, we might see Canadians spend some of these savings. That’s because pent-up demand may cause an initial spike in dining out and travel. But it’s unlikely that people will feel the need to “catch up” and spend a lot more on services like trips to the dentist and haircuts.

When services were less available due to lockdowns, Canadians spent more on goods. When the economy opens back up, spending habits will likely shift to a balance between goods and services.

But it will take a while for spending to return to pre-pandemic levels. We don’t have a clear timeline for when life will return to normal, and key risks that could postpone this return to normalcy remain:

  • a third wave of infections and lockdowns
  • delays to the vaccine rollout
  • uncertainty around COVID-19 variants

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.”

Watch Deputy Governor Schembri answer questions from the media following his speech via webcast.

Our decision yesterday

Given the positive momentum in the Canadian economy at the start of 2021, we no longer expect the economy to shrink during the first quarter. But even with the stronger near-term outlook, we cannot:

  • predict the evolution of the virus
  • easily chart the path of economic growth in the face of significant job losses

Yesterday, we reaffirmed our commitment to keep our key policy rate at 0.25 percent until economic slack is absorbed, so inflation can return sustainably to its 2 percent target. We also agreed to maintain our program of government bond purchases at its current pace of $4 billion a week.

Ultimately, Governing Council decided that the economy still requires extraordinary support from our monetary policy.”