Joe Biden’s proposed $1.9 trillion fiscal aid package would not only provide a significant stimulus for the United States, but it would also have a big effect on the Canadian economy.
The Canadian economy cannot help but be affected by its neighbor to the south.
Why should Canadians care? In short, it’s because the Canadian economy cannot help but be affected by its neighbor to the south. As the saying goes, “When America sneezes, the world catches a cold.” This is particularly true with Canada.
Consider the sheer size of the American economy and its overwhelming impact. Canada’s nominal gross domestic product as of the third quarter is $1.7 trillion in U.S. dollars. The proposal by the Biden administration by itself would exceed that figure, and that doesn’t even include the $908 billion in coronavirus relief that Congress already approved in December.
If stimulus money flows into the American economy – think about the proposed $1,400 direct payments to Americans that Biden is calling for, in addition to the $600 approved in December – it will eventually show up in the Canadian economy.
That’s because consumption in the United States is directly related to, and has a high correlation with, Canadian gross domestic product. Canada, after all, is one of America’s biggest trading partners. If Americans are producing more goods and services, they will buy more goods and services to fuel that growth. And they will look to Canadians, in part, to provide those goods and services.
The diagram below shows the moving average over four quarters of the growth rate in private consumption in the United States and GDP growth in Canada.
The big question, though, is to what extent Americans will spend their stimulus checks, as opposed to saving that money or paying down debt (which could foreshadow more spending later).
An initial assessment by the National Bureau of Economic Research found that Americans spent 40% of the one-time $1,200 payments provided under the CARES Act last spring; the rest was saved or used to pay down debt.
There is also the question of job losses, and to what extent the cash flowing to Americans will be offset by unemployment as the pandemic continues and economic activity is curtailed. In December, there were 140,000 nonfarm jobs lost in the United States and more are expected in January.
Consumer spending will depend in part on consumer confidence, which has worsened over the past month. The Biden administration has rolled out plans to address the rapid spread of the virus and to bolster the economic recovery. As Biden has said, fixing the economy first requires gaining control of the coronavirus.
Doing so could help strengthen consumer confidence and tilt the balance toward more spending versus saving. Canadian authorities will be paying close attention.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.