After nearly sixty years with little deviation, the gap between spending and income widened to historical levels in 2020 due to the pandemic and the extraordinary government response. Anthony Okolie talks with Sri Thanabalasingam, Senior Economist, TD Bank, about whether households will spend more of their savings in 2021.
- That's right, Anthony. So on the income side, we saw unprecedented government response in terms of benefit programs due to the pandemic. So that's the Canada Emergency Response Benefit and other support programs. And that really drove income up in the second quarter. In the third quarter, there was some expiring of these benefits. But still, it was providing a pretty big boost to income levels.
And so you had incomes well above what they may have grown in a regular year. And then on the spending side, you had lockdowns and, of course, health concerns because of the virus really bringing down spending in the second quarter. And millions of people also lost their jobs.
And as the economy reopened in the third quarter, this allowed for spending to rebound, but not really get back to pre-pandemic levels. So there was still a large divide between income and spending. And according to our calculations, this was about 10 times higher than what we would have seen in a typical year.
- And so when we talk about this sort of uneven recovery in the economy, talk to us about some of the sectors that really were hurt by the decline in spending and those sectors that thrived during the pandemic.
- Right. So specifically within the retail sector itself, you saw household items and household furnishing items, spending on these types of goods really take off in the second and third quarter. And that's mainly because many households that would have typically gone on vacation or spent on any of these other high-tech services, such as restaurant dining, they spent more in terms of upgrading their homes, especially as many people were also working from home as well. So that really drove spending in these categories.
And then on the flip side, as I had mentioned, these restaurant services, as well as travel and tourism, with people not going on trips anymore, that really saw spending decline in these areas. So, for example, in travel or in transportation services, the level of spending was 72% below where it was prior to the pandemic.
- OK, Sri, let's first talk about income. What's your outlook this year?
- So on the income side, we continue to expect incomes to fall further in line with what we may have expected, or to normalize, really, from these very high levels in 2020. These government support programs that are continuing to boost incomes, some of them are going to be expiring in early 2021, as well as people will roll off of unemployment benefits as they regain jobs, and then more in line with the labor market recovery as a whole. So we expect these income levels to begin to normalize in 2021.
- OK, so let's shift over to the spending side. Now, in your report, you seem to be cautiously optimistic that spending will take off. And you point to several factors. Let's talk about the first one, positive vaccine developments.
- Right, so we're starting to see the vaccine rollout already occur in Canada. And so as the vaccine is distributed to vulnerable populations, this should allow governments to reduce some of these restrictions, which then would boost spending.
- Another factor you talk about is pent-up demand.
- Right, on the pent-up demand side, Canadians have been cooped up throughout the winter because of the restrictions, as well as, of course, cold weather. And so with the spring coming along and warmer weather, you'd expect Canadians to take advantage of many services that they may have taken for granted during-- prior to the pandemic.
- And the third factor is elevated savings.
- Canadians have saved a lot through the second and third quarter, especially those households at the higher end of the income spectrum. Unable to travel, many have increased their savings. We calculate over the second and third quarter, Canadians had excess savings around $150 billion. So with that amount of money, that could be unleashed and boost spending growth as a whole in this year.
- And finally, higher household wealth.
- Right, Canadians have seen their assets increase in value, and most of that coming from the housing market that's been pretty red hot through the summer months and then actually to close the year. So with that sort of increase in wealth, that would typically flow through to higher consumption in-- through the year. So we would expect that to boost spending as well.
- So overall, just give us a quick snapshot of what your outlook is for spending and economic growth going forward.
- So on the spending front, we do expect that to be the main driver of economic growth over the medium term. So that's the next couple of years. So we expect consumption growth to average on an annual basis around 4.6%. So that's quite strong. And as I had mentioned, with those excess savings, if Canadians spend more of those savings, this could mean higher consumption growth. But at the same time, if the vaccine and the virus, if there are any sort of negative developments on that front, that could constrain spending as well.
So there are and upside and downside risks to this. And much of the future is uncertain. But given current developments, we would expect consumption growth to be quite strong this year and next.
- Sri, thank you very much for your time.
- Thank you, Anthony.