MNI POLICY: BOC Sees Prolonged Recovery; Consumers May Default

By Greg Quinn

     OTTAWA (MNI) - Bank of Canada Deputy Governor Larry Schembri said Thursday

consumer spending will likely remain subdued until a Covid-19 vaccine is widely

available, and policy makers are watching for rising insolvencies as relief

checks and mortgage deferrals wind down.

     About 700,000 households have tapped into a program to defer mortgage

payments for up to six months, and the government's CAD2,000 a month relief

checks will likely wind down after a recent eight-week extension. Consumer debts

that swelled to become larger than Canada's GDP during an earlier housing boom

were already seen as a major risk to the financial system before the pandemic

drove unemployment to a record high.

     "Some vulnerable households are likely to fall behind on their loan

payments if incomes do not recover by the time payment deferrals end," Schembri

said in the text of a speech. "The longer income losses persist, the greater the

likelihood that cash flow difficulties translate into a rise in insolvencies."

     Canada faces a "prolonged and uneven" phase of "recuperation" after what

should be a bust of renewed activity as health authorities allow bigger

gatherings and store openings, Schembri said. That includes employment, consumer

income, and the confidence for spending to drive the economy again.

     --ECONOMY LIKELY BOTTOMED

     Much of the CAD40 billion in lost labor income in the first half of the

year has been made up by government payouts, Schembri said. Still, 55% of

respondents to the BOC's quarterly consumer survey to be published next month

said they have cut spending, and a majority have halted or delayed big-ticket

purchases.

     About 20% of all mortgage borrowers do not have enough liquid assets to

cover two months of mortgage payments, Schembri said.

     On the plus side, the economy likely bottomed out in April based on gains

since then in auto sales, housing and jobs, Schembri said. The BOC has dropped

regular economic forecasts but private forecasters see a 40% annualized GDP

decline this quarter and unemployment has reached a record 13.7%. 

     "The Bank of Canada is prepared to take the necessary actions to support

the financial system and to underpin the recovery to achieve our 2 percent

inflation target within a reasonable time frame," Schembri said. 

     The BOC is also keeping an eye on the shift in consumer spending during the

pandemic to goods catering to people stuck at home, pushing up prices for

in-demand goods and likely meaning current -0.2% CPI reading is overstated,

Schembri said. 

--MNI Ottawa Bureau; +1 613-314-9647; email: greg.quinn@marketnews.com

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