Decision-makers need to look beyond the pandemic-ravaged economy’s initial rebound and plan for longer-term effects
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Canadian Imperial Bank of Commerce chief executive Victor Dodig expects the economy will recover quickly as COVID-19 restrictions ease, but that policymakers will need to implement safeguards to protect households and businesses from rising interest rates.
Dodig echoed the sentiment of many economists and financial executives during the bank’s annual meeting on Thursday, saying that Canada’s decision-makers need to look beyond the pandemic-ravaged economy’s initial rebound and plan for longer-term effects.
Pandemic restrictions have prevented Canadians from spending money and an influx of funds from government support programs along with the uncertain economic climate have led many to boost their savings.
The Bank of Canada said in March that Canadians had tucked away $180 billion in precautionary savings during the pandemic, as average disposable incomes increased by an extra $1,800 while spending fell by about $4,000.
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That extra spending power will give the economy a boost, once restrictions are lifted.
“This will help businesses recover lost ground, notably in services that have been unavailable during the pandemic,” Dodig said.
But a surge in spending could trigger inflation and force policymakers to raise interest rates, making debt more expensive to manage relative to the current ultra-low-interest-rate environment.
“That could make the challenge of managing higher pandemic-induced debt loads that much greater for governments, corporations and consumers alike,” Dodig said.
CIBC economists forecast that Canadian GDP will grow 5.5 per cent in 2021, slower than estimates of U.S. growth at six per cent due to the faster vaccine rollout south of the border.
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Some observers have called for stimulus programs to aid with the recovery. A March survey by KPMG found that seventy-seven per cent of people believe the government should conduct a major economic stimulus program, a drop from 82 per cent in January. Dodig said that any such effort aimed at digging the country out of a recession should also consider potential negative effects in the years to come.
“Any stimulus measures being considered to help drive the recovery should be focused on long-term growth rather than short-term consumption,” Dodig said.
In particular, he said the government should create deeper capital pools and allow startups to scale without leaving Canada.
Financial Post
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