Huge CERB payouts point to stronger recovery

  • The Canada Emergency Response Benefit has paid out far more than we expected and household income was probably broadly unchanged in the second quarter. Together with the confirmation today that the program will be extended by two months, this raises the chance of a stronger recovery than we forecast.
  • In April, we estimated that households would suffer a big hit to their income during the lockdown. However, the latest figures show that CERB benefits paid out from mid-March to May total $43.5bn. Even after we account for those who were already receiving employment insurance, the extra payout of $41bn seems to be more than the income that households lost over that period, which we estimate to be $38bn. (See Chart 1.) Moreover, Prime Minister Justin Trudeau said today that CERB payments will be extended by another two months for those who still cannot work, which will further support household income.
  • There are two main reasons why our initial estimate of a large income loss was wide off the mark. First, job losses have been more concentrated in low-wage sectors, with higher shares of part-time employment, than we anticipated. Our calculations suggest the average wage of the 2.9 million people that lost their jobs from February to April was $611, almost half of that for those still working. For those that lost employment, CERB has made up 82% of the income lost, rather than 60% as we first estimated.
  • The second reason relates to the expansion of CERB to cover some people still working. The initial announcement was that those who had seen their incomes fall below $250 pw would also be eligible, which we judged to be one million people. However, the way the change was implemented seems to have meant that anyone who was already earning less than $250 pw (but more than $96 pw) has also been able to receive the benefit. That would help to explain why the total number of CERB recipients since March, at 8.4 million, has been millions more than the labour market data would suggest. (See Chart 2.) We estimate that around 2.0 million CERB recipients were already earning below $250 pw before the lockdown, and have seen a boost to their income of between 200% and 520% due to CERB.
  • The large CERB payouts are a positive development for the outlook. We now estimate that overall household income will be broadly unchanged in the second quarter compared to the first, despite the slump in employment. There are still risks, however. For a start, unchanged aggregate income masks big differences between households. Many high-earners that lost their jobs are receiving much less income than normal while many low-wage earners are receiving much more. Admittedly, low-wage earners normally have the highest propensity to spend, which bodes well for a stronger initial recovery in consumption than we were expecting. But the bad news is that the hit to income among higher earners continues to have negative implications for the housing market. (See here.) Moreover, household income may yet decline. The eligibility requirements for extended CERB support may not be as broad as it is currently, and even in two months’ time employment is set to be lower than it was pre-virus. (See here.)
  • Nevertheless, the larger-than-expected payouts and CERB extension mean the risks to our GDP forecasts now lie to the upside. Our new forecasts will depend partly on how the economy fared at the height of the restrictions, so we will wait for the rest of the April activity data to be released before revising them.

Chart 1: Lost Income & CERB Payments (Mar. - May $bn)

Chart 2: CERB Recipients & Potential Recipients (mn)

Sources: Refinitiv, Government of Canada

Sources: Refinitiv, StatsCan, Government of Canada


Stephen Brown, Senior Canada Economist, stephen.brown@capitaleconomics.com

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