Big Bank CEOs See Soft Landing for Economy, Pandemic Relief Acting as ‘Shock Absorber’
The Canadian economy is poised to navigate its second act after receiving nearly $300 billion in Covid relief during the pandemic’s acute phase. According to big bank CEOs, this aid will provide a soft landing for the economy, acting as a "shock absorber" to mitigate any potential recession.
Pandemic Relief Still in the System
Canadian Imperial Bank of Commerce CEO Victor Dodig stated that consumers and businesses have extra cash on their balance sheets, which should help reduce the impact of interest rate hikes. "You see that in consumer deposits, you see that in business deposits — the stimulus of Covid relief is still in the system," said Dodig at the Bank of Nova Scotia financial summit. "That will take some time to run off."
Interest Rate Hikes and Economic Cooling
The Bank of Canada has been increasing interest rates, with its fourth straight outsized hike on Wednesday. Rates are expected to rise further to combat inflation, which is currently at four-decade highs. The increase follows a surprise 100-basis-point hike in July and half-point raises in April and June.
Bank CEOs Confident in Economic Recovery
Despite the interest rate hikes, big bank CEOs remain confident in the economy’s ability to recover quickly from any potential recession. Royal Bank of Canada CEO Dave McKay stated that he’s not concerned about the rate increases setting off a sharp recession due to the extra cash on hand and the country’s strong labour market.
Pandemic Relief as a Shock Absorber
McKay described pandemic relief as a "shock absorber" to any hard landing, allowing for a quicker recovery. "That’s how we get our head around that this should be shallow and shorter, and therefore we should bounce back more quickly," he said.
Bank of Canada’s Actions So Far
McKay gave the Bank of Canada’s actions so far a vote of confidence, stating that they’re reducing growth in mortgage loans, slowing purchase activity on credit cards, and cooling investment- and non-investment-grade credit markets. "That’s what the Bank of Canada wants," McKay said. "It wants a slowing of activity. It has to start to collapse demand to get inflation down. So all of those are positive signs."
Economic Headwinds
Despite these optimistic views, the economy is facing several headwinds. Canadian banks have raised prime rates after the Bank of Canada hike, and loan loss provisions and shakier markets are weighing on Q3 bank earnings.
Conclusion
Big bank CEOs believe that pandemic relief will provide a soft landing for the economy, acting as a "shock absorber" to any hard landing. While interest rate hikes may slow down economic activity, the extra cash on hand and strong labour market should help mitigate any potential recession. The Bank of Canada’s actions so far are seen as a positive sign, with a focus on reducing growth in mortgage loans and slowing purchase activity.
Additional Resources
For more information on the Canadian economy and big bank CEOs’ views, please refer to the following sources:
