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COVID Economic Benefits

May 6, 2020

Quite aside from the packages the government has put in place, which have probably caused at least as many problems as they have solved, there have been economic benefits to the great lockdown. 

  1. Eating Out:  Canadian eat out excessively, and with eating often comes drinking.  Typical Canadian families spend between $500 – $1,000 per month on eating out, including morning coffee, lunches, takeaway, meals between activities and special occasions.  That spending has been reduced dramatically.
  2. Impulse Purchases:  You only went to the grocery store for a loaf of bread and a bag of milk, but you left with $60 worth of other items, including your favourite ice cream, because it was on sale.  Or you planned to buy a shirt and come home with four tee shirts, two pairs of pants, three shirts and a tie.
  3. Less Travel:  Quite aside from vacation travel, most Canadians are addicted to their cars and will drive to the corner store.  Gasoline sales are way down and most travel through the lockdown has been targeted, with fewer people aimlessly driving around.
  4. Reduced Credit Card Spending:  Canadians routinely overspend on credit cards, typically about twice as much, per capita, as their American counterparts
  5. Lower Interest Rates:  Lower rates on credit cards provide an opportunity to use saved money to catch up on payment arrears and deflate excess debt. 
  6. Less Activities:  Since recreational activities have been curtailed for almost two months people are not spending on concerts, movies, sporting activities and other expensive activities.  For some families that can mean savings of many hundreds of dollars.
  7. Vacation Savings:  Many families make March Break travel plans that can be very costly, this year that money was saved.

Surely there are many more examples of cost savings that have been a direct result of the great lockdown.  Of course, it is not all rainbows and unicorns, but the point is that the overall impact has been slightly damped.  As grandma might have said “what you lose on the swings you make up for on the roundabout”.

If we can maintain the new lifestyle to which we have become accustomed, we will find that pulling through this financial ordeal does not have to be as difficult as it appears at first blush.  We have previously blogged about some of the pitfalls of the government packages – perhaps the one that will have the biggest impact is the CERB.

The CERB undoubtedly has had more applicants than any other package, unfortunately many people who did not qualify have, and continue to, received benefits.  For example, a couple on ODSP who have been bringing in $2,000 per month for the last decade were suddenly receiving $6,000 per month ($2,000 for ODSP and $2,000 each for CERB).  That money would be spent on luxuries that were previously unaffordable – effectively helping out some merchants. 

The price will be paid next year after tax season when they discover they need to pay income taxes, penalties and interest, as well as the principal amount.  All in, this couple would need to repay close to $20,000 but lacking the means the government will either reduce their ongoing benefits, write the full amount off or see the couple file bankruptcy for relief.

Since most people in a financial pickle tend to procrastinate – the couple described would likely wait a year or so, until collection activity became unbearable, before filing a bankruptcy, and would not drive up the number of filings in 2021.  In any given year during the past decade we see between 120,000-140,000 consumers filing proposal and bankruptcies each year – in 2019 the number was close to 141,000

Although 2020 filings started a little higher, the number has dropped due to the lockdown and financial uncertainty.  Since we are now almost halfway through the year, even if we saw a spike in monthly filings, the year will probably end, at most, slightly on the upside of normal.   Next year (2021) will likely start with more activity than this year and may see an uptick as the year progresses.  To equal the same number of filings as 2009 (the busiest year on record) we would need to see about 180,000 insolvencies, adjusted for population changes.

Business bankruptcies are often used a way of renewing business activities.  For example, as (incorporated) restaurants file for bankruptcy new (corporate) entities, sometimes owned by the same entrepreneurs, purchase them to continue operations using familiar proven formulas.  The new business is relieved of the debt obligations, property and equipment leases can be disclaimed or renegotiated.  Taxes and other debts and liabilities are discharged, and employees can be rehired.

While the economy will take a long time to fully recover, we will see new opportunities emerge and old business models disappear.   A much-needed housing correction seems inevitable and will likely result in a flatlining of prices for an extended period of time making housing more affordable than pre-COVID.  The same may hold true of stock markets.  Hopefully, we will see the implementation of new rules and regulations in the banking industry as it moves away from its usurious practices to a more sustainable model.

At the end of the day, whatever happens, we will see future growth and opportunity mixed with reformation, change and a paradigm shift.