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Trudeau’s Covid Aid Pays Off With Consumer-Spending Rebound – BLOOMBERG

FILE PHOTO: Justin Trudeau speaks during a news conference outside his Ottawa residence on May 27. Photographer: David Kawai/Bloomberg

BLOOMBERG, JUNE 25, 2020

Government’s C$2,000 stipend helped cushion initial blow | ‘We didn’t expect it to come back that fast,’ Royal Bank of Canada’s CEO says

By Doug Alexander for Bloomberg – Consumer spending in Canada rebounded sharply in the first half of June, thanks in part to tens of billions in government benefits paid to sidelined workers.

Consumer purchase activity from the end of May and through the first half of June was down about 13% from a year earlier, according to numbers crunched by Royal Bank of Canada and provided to Bloomberg. That’s a major improvement from April when consumer spending was down about 30% as the virus shuttered all but essential businesses across much of the country, Chief Executive Officer Dave McKay said in an interview.

RBC chief exec
Dave McKay, CEO, Royal Bank of CanadaDave McKay, CEO, Royal Bank of Canada Photographer: Cole Burston/Bloomberg

As the country’s largest lender, Royal Bank has a window into real-time data that measures the economic recovery from Covid-19. “We’re positively surprised by the quickness of the first part of the V-shaped recovery,” McKay said. “We didn’t expect it to come back that fast.”

“We’re positively surprised by the quickness of the first part of the V-shaped recovery,”

Key to the recovery was a monthly cash support for workers rolled out by Prime Minister Justin Trudeau after the pandemic put the economy into an induced coma.

Royal Bank has been providing insights to federal and provincial governments through the pandemic to help guide recovery efforts. The Toronto-based bank has 25% of the payments business market in Canada, giving it a broad view of how consumers are weathering the pandemic and where weak spots exist.

Emergency Stipend

Shopper at department store. Mask.
Trudeau’s Covid Aid Pays Off With Consumer-Spending Rebound – Bloomberg

The bank’s latest numbers — data covering a seven-week period that it hasn’t shared before — uncovered what’s behind part of the rebound: the Canadian Emergency Response Benefit program, or CERB.

It provides C$2,000 ($1,465) over a four-week period to eligible workers who have stopped working or whose hours have been reduced due to Covid-19. The program has paid out more than C$52 billion to about 8 million workers and has been extended until the end of August.

Royal Bank’s number-crunching shows Canadians who didn’t receive the benefit saw cash flow drop 4% through the pandemic and reduced their spending by 10%. This segment of the population has the biggest impact on the economy, and they’ve been slower to resume spending, McKay said.

Those Canadians who received CERB, meanwhile, faced “a real shock” with cash flow plunging 25% in April from a year earlier before getting the benefit, he said. Once the benefit was paid out, those recipients saw a 16% jump in cash flow, helping drive a 5% increase in their spending.

“They are actually helping stimulate the economy with some of that extra cash flow and so, from that perspective, you’re seeing those CERB recipients continuing to spend and not just save the money,” the CEO said. “That is quite helpful.”

But the stipend’s success brings other issues — ones that have McKay calling for a transition toward the government’s wage subsidy program for companies.

“The message there is they’ve seen more cash flow because of CERB than they saw from their employment,” McKay said. “It’s empirical evidence across millions and millions of Canadians of the disincentive to go back to work.”

‘Unintended Consequences’

The banker points to “unintended consequences” of the cash support, including hearing of students who want to quit their jobs after a month or two to qualify for the payout. While CERB has worked so far, McKay said the program is now making it difficult for restaurants, grocery stores and trades to get employees back.

Trudeau is aware of the pitfalls. His team is trying to figure out how to wean Canadians off the monthly aid and get them back into the workforce.

McKay acknowledges it’s not just the government that has to adjust. Companies also need to start reconnecting with employees, even if they have to turn to the wage subsidy plan.

“We do have to push a little bit through this recovery phase to re-engage many of our workers,” McKay said, adding those are important steps to start winding down the government’s direct cash support.

“We’re in a solvable place operating from a position probably of greater strength than if we hadn’t done it,” he said.

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