Stephen Brown, senior Canada economist at Capital Economics, believes it is inevitable that the country’s household income rate will take a hit as people come to the end of their Employment Insurance (EI) eligibility period and the Canada Recovery Benefit (CRB) closes.
However, household savings rates have kept analysts at bay about the risks posed by the winding down of benefit payments so far, he said.
“Now, we’re starting to doubt that view because all these goods shortages mean there isn’t really the extent or ability for other people to pick up slack who weren’t receiving these benefits,” Brown said in an interview Friday.
“Suddenly, there’s this sort of cliff edge when it comes to household income. We’re talking about potentially over one million people losing their benefits over the span of two months.”
Ever since the Canada Emergency Response Benefit (CERB) ended last year, people who were still unable to work due to the pandemic have been able to claim payments through a modified EI program or the CRB.
But, barring any last-minute adjustments, as the 12-month entitlement period for EI ends and the CRB comes to a close on Oct. 23, an estimated 2.2 million people that are currently receiving those benefits will be left to face the unknown.
That means Canada’s household income will fall by three per cent in the first quarter of 2022, per analysis from Capital Economics.
“So, we need an increase of somewhere in the region of a few 100,000 jobs both in September and October to offset this negative effect from the expiry of these benefits,” said Brown. “And that just seems very unlikely to us.”
Still, Brown isn’t sure the answer to this conundrum is extending these emergency programs.
“If I’m being honest, it would be tricky to make the case for extending these benefits in their current form,” he said.
On one hand, Brown believes there is a valid argument to be made that the generosity of these programs has far exceeded their need. A lot of people have been getting more money through these recovery benefits than they were at their actual jobs prior to the pandemic, he added.
“So, there certainly is a case really for bringing them down, particularly when we’re seeing all these widespread labour shortages,” he said.
On the other hand, the Bank of Canada will now face something it isn’t used to, he added.
“I think from the point of view of the central bank, if we suddenly have a sharp drop here in household income, that’s the equivalent of saying we suddenly have a very tight fiscal contraction in the fourth quarter,” said Brown. “That’s a big unknown, and it’s not something we usually see.”
However, no matter which side you look at, Brown believes the central bank will not necessarily begin focusing on a forward-looking approach yet.
“If we have these benefits expiring in October, then by the second half of next year, that’s a much longer period for these people that lose their benefits to adjust, to find employment and to see their income pick up again, So, by the second half of next year, we could potentially be in a much stronger position again,” said Brown.
“But, I’m not sure the Bank is going to be signalling that anytime soon. Given all this uncertainty and given that we still haven’t had all these pandemic issues resolved, I’m not of the view that they’re going to be more hawkish.”
For now, Canada’s economy can look forward to continued low interest rates well into 2022. The central bank has only indicated it will raise those rates, for the first time in months, at some point in the second half of next year
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