Many economic indicators show Canadians are financially healthier than national sentiment suggests, but there’s a risk that the prevailing pessimism could become a self-fulfilling prophecy, a Scotiabank economist says.
Rebekah Young, the bank’s head of inclusion and resilience economics, writes in a new paper that a “rational optimism” is required to take on the “enormous challenges” facing the Canadian economy and avoid being stuck in neutral, or, worse, talking “ourselves into decline.”
“There is this element of fear mongering going on, that negative news story of ‘A recession is coming,’” Young told Yahoo Finance Canada in an interview. “And we’ve been in this doomsday world for two years, but data is far from it.”
Various surveys and research suggest Canadians have a gloomy outlook. A recent Abacus Data survey found most Canadians don’t think they’re better off today than when they grew up. The most recent Bank of Canada surveys of consumers and businesses indicate pessimistic sentiments, with the central bank noting that “consumer perceptions of inflation continue to be higher than actual consumer price index inflation.”
Young says that the national mood can have tangible effects. “Sentiment essentially acts as the grease—or the sand—to consumption and investment decisions,” she wrote. “When households have job security and a positive view of the economy, they tend to spend and invest more.”
Positive signs
In spite of the prevailing mood, Young writes, many signs show Canadians are doing better than polls seem to indicate. The pandemic raised income and savings for many, and the comparison and comedown from that unprecedented era have been volatile. But when Young looks at figures going back before the pandemic, things look different.
Statistics Canada data show that household net worth is higher than pre-pandemic numbers by more than 25 per cent, Young writes. “Today, average household gains are roughly $20,000 above what would have been projected based on trend growth since 2019.”
Those numbers also defy what some would expect around inequality. The two lowest income quintiles have seen the highest percent gains in net worth since before the pandemic.
Furthermore, Young writes, “real disposable income sits above 2019 levels for working-age Canadians across all income brackets.” In fact, she notes, disposable income has been growing in the past year at nearly twice the pace before the pandemic, and “disconcertingly eclipsing productivity gains.”
On the job front, Young argues that the picture has also been positive. “Economics 101 would say that interest rate hikes put the brakes on economic activity and companies start firing people and you see unemployment ratcheting up very quickly,” she said. “But if you look at what’s been happening over the past two years, Canada has added about a million and a half jobs while interest rates were going up.”
It’s not all rainbows and unicorns
Broad data don’t show the struggles of households in some situations, and “mask acute pockets of vulnerability,” Young acknowledges. The national poverty rate is 9.9 per cent and food insecurity levels are up four percentage points to 16.9 per cent.
Inflation data have now been in the headlines for years, with “the prices of non-discretionary items such as housing and food … climbing faster than headline inflation.” Young notes that “price tags on staple goods also shape consumers’ perceptions about the overall price environment,” and so the steep rise of food prices may have a psychological impact even if “outlays on essentials as a share of disposable income are mostly reverting back to pre-pandemic norms.”
And Canada’s housing situation is the elephant in the room for many, Young notes. “The whiplash pace of price ascents, fuelled by chronic supply and acute demand drivers, taints the picture further as the goalposts keep getting pushed out in real-time. Adding salt to the wound, escalating rental costs provide little reprieve.”
Because housing supply isn’t likely to catch up with demand in the short term, Young writes, “this mood dampener may be around for a while.”
But finding a way to improve our mood is essential, Young argues. Addressing the challenges Canada faces “requires a new narrative that fosters rational optimism,” she writes, because “resorting to alarmism in response to its polycrisis is not yielding results.” The “divisive and gloomy view of Canada’s outlook” threatens to become “medium-term paralysis” or a decline where the actual data are no longer better than our collective mood believes.
Young says making the changes and choices that help Canada move forward requires unity, and warns that a state of paralysis brought on by ongoing pessimism would stop “anything but minor tweaks at a time when sweeping transformations are necessary—such as overhauls in tax and transfer systems, extensive reforms in health and education, rightsizing governments, or a revitalization of cooperative federalism.”
Otherwise, she writes: “The alternative — and the path we’re on — is continuing to talk ourselves into decline.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf. Download the Yahoo Finance app, available for Apple and Android.
