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Sunday, May 24, 2020
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Already on the brink, Canadians will teeter in pandemic crisis

Bill payments such as rent becoming top of mind at the top of a new month, economic issues are gaining more traction in talk about our reaction to the COVID-19 pandemic.

For now, health concerns remain the priority, but that will likely change as the economy-strangling measures put in place to slow the virus’ spread really set in. And, due to massive debt, erosion of savings, bankruptcies and long-term health declines (depression, substance abuse, stress-induced issues such as hypertension), we’ll be dealing with the economic fallout for months and years after COVID-19 has subsided (to be replaced by the next virus, particularly if cultural and social changes don’t follow).

Already, about half of Canadians are on the brink of insolvency, according to an Ipsos poll for the MNP Consumer Debt Index – that many of us are $200 or less away from being unable to pay our bills each month. Even before the crisis, about a quarter of those polled say they were already unable to meet their monthly obligations.

Against the backdrop of a global pandemic, 34 per cent of Canadians are worried either they or someone in their household could lose their job, an increase of seven points since December. Thirty per cent say they are not confident in their ability to cope financially with the loss of employment, change in wages or seasonal work without going further into debt.

“Our results underscore how vulnerable Canadian households are to income interruption. Over the next few months we’ll likely see an unfolding of two crises: the global pandemic and the bursting of the Canadian consumer debt bubble,” predicts MNP president Grant Bazian in announcing the new index numbers.

“Many households were already limited in their ability to face any kind of financial disruption. Now, all Canadians are feeling the effects on their paycheques, pocketbooks and stock portfolios. Those who were already saddled with a lot of debt are in economic survival mode.”

Things are certainly going to get much worse before they get better. And we’ll be having a debate over health and economics in the meantime.

The unprecedented steps being taken to curb the virus’ spread are being monitored by experts and academics around the globe. That includes a great deal of discussion in economic circles, says Sue Horton, university research chair and professor (health economics) in the University of Waterloo’s School of Public Health and Health Systems.

“It’s something that’s going to ripple through the whole economy,” she says of the crisis.

The pandemic and the response to it have forced big changes in the economy. The scale is unprecedented, and while computer models have been and will be constructed, there’s no way of predicting all of the effects.

History has examples of epidemics,  from the bubonic plague through to the Spanish flu and Ebola outbreak in West Africa, all of which offer some insight when trying to make predictions. But COVID-19 is global, and comes at a time of globalization and interconnections between national economies.

In this country, we’ve already seen a number of layoffs, and some jobs will have to switch to other functions, as with manufacturers moving to produce items such as ventilators and hand sanitizer.

Every field is rife with speculation about the consequences, says Horton.

“The virus has different effects on different parts of the economy,” she notes. “Clearly, most of it is bad.”

With the downturn, there have been comparisons to the Great Depression, where unemployment hit 25 per cent. Today, a 20 per cent unemployment rate is “feasible.”

That being the case, it’s appropriate for governments to be putting large amounts of money into the mix to avoid long-term economic harm.

“They have to direct money to the people who really need it.

“What you don’t want to happen is permanent damage,” she says, noting governments are spending today in hope that there will be a recovery.

When that might happen is anyone’s guess.

“That looks like a while.”

How the public will react to a prolonged downturn remains to be seen.

“I think people won’t tolerate being shut in and locking their kids out of school for 12 months,” she says of compliance to stringent rules.

Draconian measures applied in China, for instance, may not work here.

Asked if the cure (economic shutdown) might be worse than the disease, she hedges her bets.

“There are always tradeoffs.”

We can expect the economic impacts to become a larger issue the longer the crisis drags on. As the MNP data show, most Canadians are in no financial position to simply ride out the storm. Simply deferring payments for the likes of rent, mortgages and taxes doesn’t help those doing with only part of their incomes – it just digs a deeper hole.

Canadians are already struggling with more than $2 trillion in consumer debt – the average debt per consumer was $73,000 at the end of 2019.

And given rising house prices, increases that have outstripped economic and income growth for years, it’s no surprise that mortgage delinquency rates were also higher at the end of 2019. That’s only getting worse day by day now.

Average incomes have been more or less stagnant for more than 30 years. Debt levels, however, have exploded. Quarter after quarter, we hit new levels of indebtedness, both total household debt (which includes mortgages on increasingly out-of-reach homes) and consumer debt (i.e. credit cards, lines of credit).

Borrowing up, savings down – the trend isn’t new. Most alarmingly, we’re borrowing for everyday expenses – unable to pay the bills – not just for big-ticket items or even trinkets. Likewise, we’re raiding what savings we do have to cover day-to-day expenses,

This is no surprise to governments, which are complicit in these changes. As with drops in corporate taxes and shifts to consumer taxes, the goal is to shift the burden to you. This will continue transferring wealth to those already making the biggest gains while contributing to the debt loads of middle-class Canadians trying to maintain their position as real incomes – both pre- and after-tax – continue to fall.

That trend will be accelerated when the COVID-19 crisis passes and we start dealing with the financial mess.

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