THIS SECTION OF THE ANNUAL REPORT PROVIDING MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) OF THE CONSOLIDATED RESULTS OF CREDIT UNION CENTRAL OF MANITOBA (“CUCM”) SHOULD BE READ IN CONJUNCTION WITH THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES AS AT AND FOR THE YEAR ENDED DECEMBER 31, 2020. THE CONSOLIDATED FINANCIAL STATEMENTS ARE REPORTED IN CANADIAN DOLLARS AND HAVE BEEN PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”). THIS MD&A IS DATED FEBRUARY 17, 2021 AND PROVIDES COMMENTS REGARDING CUCM’S CORE STRATEGIES, FINANCIAL OPERATING RESULTS, RISK MANAGEMENT AND BUSINESS OUTLOOK.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements. By their very nature, forward-looking statements require that management make assumptions involving several factors, many of which are beyond management’s control and which may cause actual results to differ from the expectations expressed in the forward-looking statements. These factors include, but are not limited to: changes in general economic conditions; interest rates, currency exchange rates and liquidity conditions; the effects of economic conditions on the Manitoba credit union system; legislative or regulatory developments; changes in accounting standards or policies; and CUCM’s success in anticipating and managing the risks inherent in these factors. Readers are cautioned that the foregoing list is not exhaustive. CUCM does not undertake to update any forward-looking statements contained in this annual report. Readers should not place undue reliance on forward-looking statements, as actual results may differ materially from expectations.
MANITOBA CREDIT UNION SYSTEM
Deposits in the Manitoba credit union system (the “System”), which excludes associate members of CUCM, grew by 9.0 per cent, up from 8.8 per cent in 2019. Deposit growth is the primary funding source for System asset growth. System assets grew 9.0 per cent in 2020, up from 8.6 per cent in 2019. System loans grew by 3.5 per cent in 2020, down from 3.7 per cent in 2019. As a percentage of total credit union members’ deposits, System deposits held at CUCM ended the year at 19.8 per cent (2019 – 15.4 per cent). Member deposits at CUCM grew 40.4 per cent in 2020 and, excluding the impact of mark-to-market valuations, ended the year $1,939 million higher than 2019. Year-over-year, excluding the impact of mark-to-market valuations, short-term member deposits (original term less than 13 months) increased by $1,950 million, while longer term member deposits fell by $11 million.
Credit unions continue to keep virtually all of their liquidity deposits in short terms. At year-end, 99.6 per cent of deposits matured within 13 months, up from 99.3 per cent at year-end 2019. Many members of Manitoba credit unions have locked in their borrowing costs (e.g., mortgages) at today’s low rates. To manage their interest rate risk, credit unions are maintaining their liquidity in very short terms (under 6 months) and some are also transacting interest rate swaps. After including the financial margin distributions, short-term deposits provide a higher return than what could be earned on long-term deposits (see Returns on Members’ Deposits below), so there is little incentive for credit unions to extend term on their deposits.
A recent survey of credit unions indicates they expect little change in the level and composition of their liquidity deposits over the coming year.
This report includes forward-looking statements. By their very nature, forward-looking statements require that management make assumptions involving several factors, many of which are beyond management’s control and which may cause actual results to differ from the expectations expressed in the forward-looking statements. These factors include, but are not limited to: changes in general economic conditions; interest rates, currency exchange rates and liquidity conditions; the effects of economic conditions on the Manitoba credit union system; legislative or regulatory developments; changes in accounting standards or policies; and CUCM’s success in anticipating and managing the risks inherent in these factors. Readers are cautioned that the foregoing list is not exhaustive. CUCM does not undertake to update any forward-looking statements contained in this annual report. Readers should not place undue reliance on forward-looking statements, as actual results may differ materially from expectations.
MANITOBA CREDIT UNION SYSTEM
Deposits in the Manitoba credit union system (the “System”), which excludes associate members of CUCM, grew by 9.0 per cent, up from 8.8 per cent in 2019. Deposit growth is the primary funding source for System asset growth. System assets grew 9.0 per cent in 2020, up from 8.6 per cent in 2019. System loans grew by 3.5 per cent in 2020, down from 3.7 per cent in 2019. As a percentage of total credit union members’ deposits, System deposits held at CUCM ended the year at 19.8 per cent (2019 – 15.4 per cent). Member deposits at CUCM grew 40.4 per cent in 2020 and, excluding the impact of mark-to-market valuations, ended the year $1,939 million higher than 2019. Year-over-year, excluding the impact of mark-to-market valuations, short-term member deposits (original term less than 13 months) increased by $1,950 million, while longer term member deposits fell by $11 million.
Credit unions continue to keep virtually all of their liquidity deposits in short terms. At year-end, 99.6 per cent of deposits matured within 13 months, up from 99.3 per cent at year-end 2019. Many members of Manitoba credit unions have locked in their borrowing costs (e.g., mortgages) at today’s low rates. To manage their interest rate risk, credit unions are maintaining their liquidity in very short terms (under 6 months) and some are also transacting interest rate swaps. After including the financial margin distributions, short-term deposits provide a higher return than what could be earned on long-term deposits (see Returns on Members’ Deposits below), so there is little incentive for credit unions to extend term on their deposits.
A recent survey of credit unions indicates they expect little change in the level and composition of their liquidity deposits over the coming year.
CUCM PROFILE
On behalf of its members and associate members, CUCM manages liquidity reserves, facilitates clearing and settlement transactions through the Bank of Canada, monitors credit granting procedures, and provides trade services in areas such as corporate governance, government relations, representation and advocacy.
CUCM also provides banking, human resources, research, communications, marketing, planning, lending, procurement, product/service research and development, and business consulting services to its members.
Costs for providing these services are passed on to the users of the services, mainly in the form of assessments and fees-for-service.
CUCM YEAR IN REVIEW
The messages from the Chairman of the Board and the President & CEO, as well as other items earlier in this annual report, contain highlights and major developments, internal and external, that affected CUCM in 2020.
OPERATING RESULTS
Returns on members’ deposits
CUCM’s weighted average cost of funds fell to 0.705 per cent from 1.883 per cent in 2019.
The average cost of funds paid on short-term liquidity balances (Canadian and U.S. balances, combined) was 41.42 BPS on current accounts and 78.11 BPS on short-term deposit balances, for a combined average cost of 70.51 BPS. Financial margin distributions equated to an additional 104.78 BPS on short-term deposits (both current accounts and short-term deposits) in the year, resulting in a total average payment of 175.29 BPS.
The average cost of funds paid on longer-term deposits was 188.54 BPS. An additional distribution of financial margin of 10.70 BPS was paid on these deposits (reflecting the additional income earned from the bond investments matched to these deposits), for a total average payment of 199.24 BPS on longer-term deposits.
Finally, the incremental income earned on lending to members is distributed in proportion to excess liquidity deposits. In 2020, the high levels of liquidity deposits meant this component of financial margin earned was immaterial.
Financial Margin
Credit union liquidity deposits and share capital are managed as separate portfolios. Investment earnings are distributed in the form of financial margin distributions and dividends, respectively.
Liquidity deposits at CUCM grew at an unprecedented pace in 2019, with the timing of that growth defying seasonal patterns. The liquidity pool ended the year up $2,404 million, or 45%.
CUCM’s asset swap portfolio continues to be the primary source of financial margin earnings. Asset swaps are composed of longer-term debt instruments and interest rate swap agreements which, when combined, generate a rate of return that resets monthly or quarterly. Because the reset frequency mimics credit unions’ preference for terms maturing within three months, CUCM takes on virtually no interest rate risk. Yields earned on this portfolio exceed those on alternative short-term investments and enhance the returns paid on credit union short-term deposits.
On behalf of its members and associate members, CUCM manages liquidity reserves, facilitates clearing and settlement transactions through the Bank of Canada, monitors credit granting procedures, and provides trade services in areas such as corporate governance, government relations, representation and advocacy.
CUCM also provides banking, human resources, research, communications, marketing, planning, lending, procurement, product/service research and development, and business consulting services to its members.
Costs for providing these services are passed on to the users of the services, mainly in the form of assessments and fees-for-service.
CUCM YEAR IN REVIEW
The messages from the Chairman of the Board and the President & CEO, as well as other items earlier in this annual report, contain highlights and major developments, internal and external, that affected CUCM in 2020.
OPERATING RESULTS
Returns on members’ deposits
CUCM’s weighted average cost of funds fell to 0.705 per cent from 1.883 per cent in 2019.
The average cost of funds paid on short-term liquidity balances (Canadian and U.S. balances, combined) was 41.42 BPS on current accounts and 78.11 BPS on short-term deposit balances, for a combined average cost of 70.51 BPS. Financial margin distributions equated to an additional 104.78 BPS on short-term deposits (both current accounts and short-term deposits) in the year, resulting in a total average payment of 175.29 BPS.
The average cost of funds paid on longer-term deposits was 188.54 BPS. An additional distribution of financial margin of 10.70 BPS was paid on these deposits (reflecting the additional income earned from the bond investments matched to these deposits), for a total average payment of 199.24 BPS on longer-term deposits.
Finally, the incremental income earned on lending to members is distributed in proportion to excess liquidity deposits. In 2020, the high levels of liquidity deposits meant this component of financial margin earned was immaterial.
Financial Margin
Credit union liquidity deposits and share capital are managed as separate portfolios. Investment earnings are distributed in the form of financial margin distributions and dividends, respectively.
Liquidity deposits at CUCM grew at an unprecedented pace in 2019, with the timing of that growth defying seasonal patterns. The liquidity pool ended the year up $2,404 million, or 45%.
CUCM’s asset swap portfolio continues to be the primary source of financial margin earnings. Asset swaps are composed of longer-term debt instruments and interest rate swap agreements which, when combined, generate a rate of return that resets monthly or quarterly. Because the reset frequency mimics credit unions’ preference for terms maturing within three months, CUCM takes on virtually no interest rate risk. Yields earned on this portfolio exceed those on alternative short-term investments and enhance the returns paid on credit union short-term deposits.
Asset swap maturities were relatively heavy in 2020 ($723 million), with most of the maturities occurring in the fourth quarter when market spreads were at their tightest levels for the year. Fortunately, CUCM had begun reinvesting these asset swaps (as well as the liquidity growth) earlier in the year to take advantage of wider spreads, limiting the potential impact on returns. Financial margin returns averaged 104.78 BPS in the year (2019 – 100.80 bps), peaking in December at 110.81 BPS. CUCM expects 2021 returns to decline due to the tighter market spreads. Further liquidity growth will exacerbate that decline.
In 2021, $870 million of asset swaps are scheduled to mature, and more than half of these will do so in the first quarter. This will provide an ample supply of cash should liquidity decline. Economic activity is expected to rebound with the vaccination roll-out, but the timing of that seems uncertain given supply issues. In the absence of declining liquidity, the funds will be reinvested in new asset swaps. Market spreads are tighter now than they were before the financial crisis, so there may be a market correction that provides better asset swap opportunities.
The longer-term nature of the assets (bonds) underlying asset swaps generates some liquidity risk; CUCM monitors and manages this closely as part of its mandate to steward the System’s liquidity.
Financial margin earned on investments funded by share capital are paid in full to shareholders via dividends. CUCM’s 2021 budget assumes the Bank of Canada will maintain rates at the current level for the entire year, resulting in slightly lower returns on this portfolio than earned in 2020.
Net Operating Expense
CUCM operates on a cost-recovery basis with the majority of its costs recovered from its members via assessments or fees-for-service. CUCM does incur some costs that it chooses not to recover from its members. Unrecovered costs results in net operating expense for CUCM. These costs typically consist of project costs and donations. Donations costs stem from CUCM matching individual employee donations made to supported charities.
CUCM’s operations are primarily financed through recoveries, from members, of the costs incurred to provide services to members. These recoveries mainly take the form of assessments to members (basic and liquidity management) and fee income charged for services to members. In 2020, members’ assessments totaled $9,450 (2019 – $9,876).
Capital
Capital levels (share capital and retained earnings at CUCM) are regulated by the Financial Institutions Regulation Branch of Manitoba Finance. The Credit Unions and Caisses Populaires Act requires CUCM to maintain a minimum capital level equal to 5% of CUCM’s assets. In addition to the regulations, policies regarding capital levels have been established by CUCM’s board of directors. The board’s policy for setting the level of retained earnings is guided by CUCM’s operating principle that the system’s equity belongs with credit unions, so earnings retained by CUCM are minimized.
In 2021, $870 million of asset swaps are scheduled to mature, and more than half of these will do so in the first quarter. This will provide an ample supply of cash should liquidity decline. Economic activity is expected to rebound with the vaccination roll-out, but the timing of that seems uncertain given supply issues. In the absence of declining liquidity, the funds will be reinvested in new asset swaps. Market spreads are tighter now than they were before the financial crisis, so there may be a market correction that provides better asset swap opportunities.
The longer-term nature of the assets (bonds) underlying asset swaps generates some liquidity risk; CUCM monitors and manages this closely as part of its mandate to steward the System’s liquidity.
Financial margin earned on investments funded by share capital are paid in full to shareholders via dividends. CUCM’s 2021 budget assumes the Bank of Canada will maintain rates at the current level for the entire year, resulting in slightly lower returns on this portfolio than earned in 2020.
Net Operating Expense
CUCM operates on a cost-recovery basis with the majority of its costs recovered from its members via assessments or fees-for-service. CUCM does incur some costs that it chooses not to recover from its members. Unrecovered costs results in net operating expense for CUCM. These costs typically consist of project costs and donations. Donations costs stem from CUCM matching individual employee donations made to supported charities.
CUCM’s operations are primarily financed through recoveries, from members, of the costs incurred to provide services to members. These recoveries mainly take the form of assessments to members (basic and liquidity management) and fee income charged for services to members. In 2020, members’ assessments totaled $9,450 (2019 – $9,876).
Capital
Capital levels (share capital and retained earnings at CUCM) are regulated by the Financial Institutions Regulation Branch of Manitoba Finance. The Credit Unions and Caisses Populaires Act requires CUCM to maintain a minimum capital level equal to 5% of CUCM’s assets. In addition to the regulations, policies regarding capital levels have been established by CUCM’s board of directors. The board’s policy for setting the level of retained earnings is guided by CUCM’s operating principle that the system’s equity belongs with credit unions, so earnings retained by CUCM are minimized.
Balanced Scorecard
The Balanced Scorecard (“BSC”) is a management system, as well as a measurement system, that enables CUCM to clarify vision and strategy and translate them into action. It aligns to CUCM’s goals and provides feedback on internal business processes and external outcomes, with the goal of helping CUCM continuously improve strategic results.
The BSC establishes measures of organizational success across four balanced perspectives: financial, customer focus, process, and organizational capacity. In 2020, the overall BSC result was 82.60 points out of a possible of 100.
ECONOMIC OUTLOOK
The COVID-19 pandemic has severely damaged the global, national and Manitoba economies. The recession in 2020 will go down as the worst in modern history. To illustrate the severity, the world economy contracted by 1.4 per cent in the wake of the 2008–09 financial crisis. It fell close to 4 per cent in 2020. The economic fallout would have been dramatically worse were it not for the unprecedented actions of governments to constrain the number of infections and provide fiscal support to individuals and businesses. Central banks also contributed to the stimulus by taking current interest rates to near zero and pursuing large scale bond buying programs that lowered longer-term interest rates. The result was an avoidance of deflation and a possible depression, which came at the cost of massive government deficits and rapidly rising debts. Thankfully, debt is affordable for now because of low debt-servicing costs.
Despite the positive fiscal measures, policymakers could only temper the extent of the recession. The contraction was very steep, and concentrated in only a couple of months in the first half of 2020. Indeed, the subsequent reopening of economies around the world led to strong initial rebounds in growth, many of which turned out to be short-lived. Regrettably, a second wave of infection proved to be severe in Europe and North America, which reached an intensity that required new government restrictions and selected lockdowns. This stalled the recovery heading into the new year. However, 2020 ended with positive news that effective vaccines had been developed. As vaccination campaigns roll out across the globe, 2021 will be a year of transition from pandemic to a post-pandemic recovery that will shape economic fortunes for years to come.
Global economic perspectives
The pandemic and recession varied by region and by country. For example, while Asia experienced a deep economic contraction, it was less pronounced than that experienced in Europe and North America. While some countries in Asia deployed effective contact and tracing programs that reduced health risks, the main reason for the region’s outperformance was that the Chinese economy weathered the pandemic and economic fallout better than other nations. Although COVID-19 was first detected in China, its containment and economic policies resulted in the Chinese economy growing by 2.3 per cent in 2020 — the only large economy to post growth. In 2021, Asia is expected to deliver a robust rebound of 6.9 per cent, with China growing by 8.9 per cent. The main implication is that the pandemic did not alter the dominant economic theme of the rising importance of Asia.
Soon after COVID-19 appeared in China, cases emerged in Europe and the acceleration of infection spread quickly. Government restrictions were imposed, again to varying degrees, and this led to a deep economic contraction in the largest economies in the European Union. The UK economy faced a particularly difficult situation. In addition to the pandemic, the UK was negotiating its exit from the European Union, which was dampening business investment. Overall, the euro-zone economy likely contracted by 6.8 per cent in 2020, while the UK contracted by 10 per cent. Although the second wave led to a double dip recession in parts of Europe, the progress towards vaccination should mean that the eurozone expands by 4.1 per cent in 2021 and the UK advances 5.0 per cent.
North America started reporting cases of COVID-19 around the same time as Europe, and soon governments had to impose states of emergency that allowed them to shut down nonessential activities to reduce the number of new infections. The U.S. struggled to deal with the first wave, arguably because of a weak government response and lack of public support for wearing masks and other actions to limit the spread. The U.S. public received conflicting messages about how to respond, from health officials, state governments and the U.S. administration. America did diminish the rate of increase in infections, but it was less effective than many other large economies. There were also concerns about the loss of government fiscal support in the fall, as temporary emergency measures ended. Then, the U.S. election in November prevented the implementation of a fiscal stimulus package to follow the one put in place early in 2020 in response to the pandemic. Despite these challenges, the U.S. economy proved more resilient that its European peers, as it contracted by less, 3.5 per cent, in 2020. In 2021 the U.S. economy is expected to post a solid rebound of 4.1 per cent. The second wave has slowed, but not derailed, growth. Vaccination is proceeding and a large fiscal stimulus package is working its way through Congress at the time of writing. So, while the second wave is a drag on the economy at the start of 2021, the prospects are for the U.S. recovery to gain greater momentum over the course of the year. There is good news for Canadian exporters, although they still have their own challenges, as President Biden’s Buy America program could put some Canadian firms at a disadvantage. It is also important to highlight that while President Biden may take a more constructive approach with China, U.S.-China relations may remain strained, which puts Canada in a difficult position, as both nations are major trading partners.
The Balanced Scorecard (“BSC”) is a management system, as well as a measurement system, that enables CUCM to clarify vision and strategy and translate them into action. It aligns to CUCM’s goals and provides feedback on internal business processes and external outcomes, with the goal of helping CUCM continuously improve strategic results.
The BSC establishes measures of organizational success across four balanced perspectives: financial, customer focus, process, and organizational capacity. In 2020, the overall BSC result was 82.60 points out of a possible of 100.
ECONOMIC OUTLOOK
The COVID-19 pandemic has severely damaged the global, national and Manitoba economies. The recession in 2020 will go down as the worst in modern history. To illustrate the severity, the world economy contracted by 1.4 per cent in the wake of the 2008–09 financial crisis. It fell close to 4 per cent in 2020. The economic fallout would have been dramatically worse were it not for the unprecedented actions of governments to constrain the number of infections and provide fiscal support to individuals and businesses. Central banks also contributed to the stimulus by taking current interest rates to near zero and pursuing large scale bond buying programs that lowered longer-term interest rates. The result was an avoidance of deflation and a possible depression, which came at the cost of massive government deficits and rapidly rising debts. Thankfully, debt is affordable for now because of low debt-servicing costs.
Despite the positive fiscal measures, policymakers could only temper the extent of the recession. The contraction was very steep, and concentrated in only a couple of months in the first half of 2020. Indeed, the subsequent reopening of economies around the world led to strong initial rebounds in growth, many of which turned out to be short-lived. Regrettably, a second wave of infection proved to be severe in Europe and North America, which reached an intensity that required new government restrictions and selected lockdowns. This stalled the recovery heading into the new year. However, 2020 ended with positive news that effective vaccines had been developed. As vaccination campaigns roll out across the globe, 2021 will be a year of transition from pandemic to a post-pandemic recovery that will shape economic fortunes for years to come.
Global economic perspectives
The pandemic and recession varied by region and by country. For example, while Asia experienced a deep economic contraction, it was less pronounced than that experienced in Europe and North America. While some countries in Asia deployed effective contact and tracing programs that reduced health risks, the main reason for the region’s outperformance was that the Chinese economy weathered the pandemic and economic fallout better than other nations. Although COVID-19 was first detected in China, its containment and economic policies resulted in the Chinese economy growing by 2.3 per cent in 2020 — the only large economy to post growth. In 2021, Asia is expected to deliver a robust rebound of 6.9 per cent, with China growing by 8.9 per cent. The main implication is that the pandemic did not alter the dominant economic theme of the rising importance of Asia.
Soon after COVID-19 appeared in China, cases emerged in Europe and the acceleration of infection spread quickly. Government restrictions were imposed, again to varying degrees, and this led to a deep economic contraction in the largest economies in the European Union. The UK economy faced a particularly difficult situation. In addition to the pandemic, the UK was negotiating its exit from the European Union, which was dampening business investment. Overall, the euro-zone economy likely contracted by 6.8 per cent in 2020, while the UK contracted by 10 per cent. Although the second wave led to a double dip recession in parts of Europe, the progress towards vaccination should mean that the eurozone expands by 4.1 per cent in 2021 and the UK advances 5.0 per cent.
North America started reporting cases of COVID-19 around the same time as Europe, and soon governments had to impose states of emergency that allowed them to shut down nonessential activities to reduce the number of new infections. The U.S. struggled to deal with the first wave, arguably because of a weak government response and lack of public support for wearing masks and other actions to limit the spread. The U.S. public received conflicting messages about how to respond, from health officials, state governments and the U.S. administration. America did diminish the rate of increase in infections, but it was less effective than many other large economies. There were also concerns about the loss of government fiscal support in the fall, as temporary emergency measures ended. Then, the U.S. election in November prevented the implementation of a fiscal stimulus package to follow the one put in place early in 2020 in response to the pandemic. Despite these challenges, the U.S. economy proved more resilient that its European peers, as it contracted by less, 3.5 per cent, in 2020. In 2021 the U.S. economy is expected to post a solid rebound of 4.1 per cent. The second wave has slowed, but not derailed, growth. Vaccination is proceeding and a large fiscal stimulus package is working its way through Congress at the time of writing. So, while the second wave is a drag on the economy at the start of 2021, the prospects are for the U.S. recovery to gain greater momentum over the course of the year. There is good news for Canadian exporters, although they still have their own challenges, as President Biden’s Buy America program could put some Canadian firms at a disadvantage. It is also important to highlight that while President Biden may take a more constructive approach with China, U.S.-China relations may remain strained, which puts Canada in a difficult position, as both nations are major trading partners.
The Canadian experience
In Canada, the impact of the pandemic in China was felt quickly. As financial markets started to respond to the risk of a global pandemic, commodity prices plunged and the value of Canadian exports fell. Moreover, rising infection rates in February and March led Canadian officials to worry that the pandemic could overwhelm the domestic health care system. Consequently, provinces from coast-to-coast imposed a lockdown of non-essential activities for the second half of March and into April. The result was that the Canadian economy plunged by 17.7 per cent over those two months — the most rapid and deepest recession on record. However, the curve of new COVID-19 cases gradually flattened, allowing a reopening of the economy in May. The subsequent rebound was dramatic, and by November the size of the economy was 3.5 per cent smaller than it was pre-COVID. The recovery was supported by strong consumer spending and robust residential real estate activity. Although business investment and exports contributed to the recovery, their gains were less impressive. Overall, the Canadian economy likely contracted by 5.7 per cent in 2020.
The actions of policymakers were a key contributor to the resilience of the Canadian economy. The Bank of Canada cut its benchmark overnight rate to 0.25 per cent in early 2020, a level that it considers to be the lower bound and signaled that it did not want to take interest rates negative, like in Europe and Japan. To provide additional stimulus, it launched a large-scale bond-buying program. By purchasing federal, provincial and some corporate bonds, the Bank of Canada lowered longer-term interest rates.
While this monetary stimulus was welcome, one can argue that the fiscal stimulus provided by governments was far more important. Since governments told non-essential workers to stay home and non-essential businesses to close, it was imperative to address the income shock to households and firms. The resulting actions led to a federal deficit of around $400 billion in fiscal 2020–21. The federal debt-to-income ratio soared to roughly 50 per cent. While the fiscal deterioration is worrying, it was the price of avoiding a more severe health and economic outcome. Moreover, low interest rates mean that the fiscal price tag was affordable. To illustrate the profound nature of the federal government’s response, consider that while the unemployment rate skyrocketed, personal disposable income actually increased during the pandemic because the government income transfers exceeded the loss in labour compensation.
Regrettably, the second wave in the fall of 2020 proved particularly pronounced. To be clear, a second wave was anticipated. It was inevitable that cases would rise as the economy was reopened, and the arrival of cooler weather meant more social contact indoors. The hope was the infection rate would not be so bad as to threaten healthcare systems, but that hope was dashed in many provinces. This led to renewed government restrictions that dampened economic growth and threatened to lead to a double dip in the economy.
Canada, like its international peers, is in for an economic recovery in 2021. Vaccination is proceeding, albeit at a disappointingly slow pace: it is likely to take until the fall for vaccination to be fully completed across the country. However, as the second wave is brought under control, we should see another reopening boost just as we did last spring. As the Canadian economy gradually recovers from the pandemic, we expect to see real growth of 4.2 per cent in 2021 and 4.9 per cent in 2022.
Manitoba’s pandemic experience and prospects
Manitoba’s pandemic experience, and therefore its economic recovery, has played out a bit differently than in most of the rest of the country. During the first wave of the pandemic, Manitoba did relatively well. Case counts were low and Manitoba was able to begin reopening its economy in early May. Restaurants could offer patio dining, elective surgeries resumed, retailers reopened alongside a host of services. By June, many services were restored and gathering limits were increased, precipitating a fast - er economic recovery than we saw in other parts of the country. The second quarter decline in economic activity was likely far less than that for Canada as a whole.
The second wave of the pandemic, however, hit Manitoba earlier and harder than many other parts of the country. With case counts rising rapidly as temperatures cooled, the Manitoba government was forced to implement some of the tightest restrictions on activity the country had seen since the spring. On November 12, the entire province moved into the red zone of restrictions, closing in-person shopping at non-essential retail businesses and most services while also imposing restrictions on gatherings. Regulations were further tightened just eight days later to limit outdoor gatherings to only five people and retailers that remained open were prohibited from selling anything that wasn’t deemed essential. These restrictive measures only began to loosen towards the end of January, with a further easing of restrictions in mid-February. The imposition of these public health measures will weigh on Manitoba’s economic performance in the fourth quarter of 2020 and into the first quarter of 2021.
Employment fell sharply in March and April, but rebounded strongly from May to September before pulling back in the last three months of the year, when the second wave hit. Overall, employment was down by 3.7 per cent in 2020, by far the largest drop on record. Nevertheless, this decline was the third smallest across the provinces.
With Manitoba reopening earlier than many other provinces in the spring of 2020, the retail and manufacturing sectors also performed relatively well. As of September, retail sales in Manitoba had posted the second strongest rebound across provinces from pre-pandemic levels. But with employment beginning to decline in October, retail sales did too, dropping modestly in October and more significantly in November. Even with those declines, they remained 3.4 per cent above their February level. While the manufacturing sectors in most provinces are still striving to recoup pandemic loses, by November, Manitoba’s manufacturing sales were 6.3 per cent above their February levels due to strong growth in the food manufacturing subsector.
As was the case across Canada, Manitoba experienced a sharp decline in activity in high-contact service sectors such as accommodation and food services, and arts, entertainment and recreation, in 2020. On the positive side, GDP in the utilities, public administration and the finance, real estate and insurance industries are expected to have held up well in 2020. Looking forward to 2021, we expect to see broad-based growth as industries that were pummeled in 2020 bounce back. Particularly strong gains are expected in the service sector as restrictions are eased. Additionally, manufacturing is in for a double-digit gain in 2021 as the massive new pea processing plant near Portage la Prairie begins operations. However, the outlook is not all bright, with engineering construction expected to fall as work has fin - ished on the Great Northern Transmission Line and is winding down on the large Keeyask dam.
Overall, Manitoba’s economy is expected to have declined by 5.5 per cent in 2020. However, with restrictions now beginning to ease, the province is poised for a large rebound starting in the second quarter of 2021. Growth will continue over the course of the year, lifting the economy by 4.3 per cent. This will bring employment up by just over 40 thousand and drop the unemployment rate to 6.1 per cent from an average of 7.9 per cent in 2020.
Outlook shaped by legacies of the pandemic
The post-pandemic outlook has many dimensions.
First, it will take a few years to recover the damage that has been done to the economy and the labour market. This means there will be considerable slack in the economy, represented by an elevated unemployment rate and underutilized plants and equipment. This will keep inflation under wraps and means that federal and provincial governments will want to provide stimulus to accelerate the recovery. It also implies that the Bank of Canada is unlikely to raise interest rates for a couple of years. So, low interest rates and concerns about high government indebtedness will persist. Eventually, governments will need to rebalance their finances, but fiscal restraint is likely a story for 2022 or beyond.
Second, the pandemic has had a varied impact on industries. This is sometimes referred to as a K-shaped recession and recovery, because some industries have been resilient while others have been particularly hard hit.
Third, the pandemic has accelerated the impact of the IT revolution. There has been a dramatic shift to digital content, digital delivery and digital investment. For example, e-commerce has soared in retail. The pandemic also caused a shift to remote work. There was a trend in this direction pre-pandemic, but it was accelerated to an incredible degree. The shift to digital and flexible work is likely to persist post pandemic. This will likely impact business models, demand for commercial real estate, consumer behaviour and industry performance.
Fourth, the role of government has drastically increased during the pandemic, and government is likely to be heavily involved in the post-pandemic environment. For example, governments have now become aware of the importance of having some essential products (like personal protective equipment and vaccine production capacity) made domestically.
Governments have also become cognizant of the fact that the recession impacted disadvantaged workers the most, and this has shone a light on the importance of improving economic outcomes of women, visible minorities, immigrants, Indigenous people and youth. There is also continued commitment to move toward a greener, less carbon intensive future. These priorities are likely to have an influence on future government policies, and shape economic outcomes.
Lastly, Canadian households have accumulated a vast pool of savings during the pandemic. Typically, aggregate household savings is about than $30 billion a year. However, the total accumulation of savings is likely to have been roughly $200 billion in 2020. These savings represents the impact of government transfers and the inability of Canadians to spend on things they like or like to do — such as going to movies, eating out at restaurants, or going on international vacations. With consumer spending representing around 60 per cent of GDP, how and when the savings get used will determine the shape of the recovery. But this also leads to a concern. The recovery from the 2008–09 financial crisis was fueled by consumer spending and residential housing, while exports and investment lagged. It is concerning that consumers and residential real estate could once again be the engine of recovery, while commercial real estate, investment and exports provide less lift.
The main message is that there will be long legacies from the pandemic that will shape the global, Canadian and Manitoban economies. The adjustments will have distributional impacts that will need to be assessed and addressed.
In Canada, the impact of the pandemic in China was felt quickly. As financial markets started to respond to the risk of a global pandemic, commodity prices plunged and the value of Canadian exports fell. Moreover, rising infection rates in February and March led Canadian officials to worry that the pandemic could overwhelm the domestic health care system. Consequently, provinces from coast-to-coast imposed a lockdown of non-essential activities for the second half of March and into April. The result was that the Canadian economy plunged by 17.7 per cent over those two months — the most rapid and deepest recession on record. However, the curve of new COVID-19 cases gradually flattened, allowing a reopening of the economy in May. The subsequent rebound was dramatic, and by November the size of the economy was 3.5 per cent smaller than it was pre-COVID. The recovery was supported by strong consumer spending and robust residential real estate activity. Although business investment and exports contributed to the recovery, their gains were less impressive. Overall, the Canadian economy likely contracted by 5.7 per cent in 2020.
The actions of policymakers were a key contributor to the resilience of the Canadian economy. The Bank of Canada cut its benchmark overnight rate to 0.25 per cent in early 2020, a level that it considers to be the lower bound and signaled that it did not want to take interest rates negative, like in Europe and Japan. To provide additional stimulus, it launched a large-scale bond-buying program. By purchasing federal, provincial and some corporate bonds, the Bank of Canada lowered longer-term interest rates.
While this monetary stimulus was welcome, one can argue that the fiscal stimulus provided by governments was far more important. Since governments told non-essential workers to stay home and non-essential businesses to close, it was imperative to address the income shock to households and firms. The resulting actions led to a federal deficit of around $400 billion in fiscal 2020–21. The federal debt-to-income ratio soared to roughly 50 per cent. While the fiscal deterioration is worrying, it was the price of avoiding a more severe health and economic outcome. Moreover, low interest rates mean that the fiscal price tag was affordable. To illustrate the profound nature of the federal government’s response, consider that while the unemployment rate skyrocketed, personal disposable income actually increased during the pandemic because the government income transfers exceeded the loss in labour compensation.
Regrettably, the second wave in the fall of 2020 proved particularly pronounced. To be clear, a second wave was anticipated. It was inevitable that cases would rise as the economy was reopened, and the arrival of cooler weather meant more social contact indoors. The hope was the infection rate would not be so bad as to threaten healthcare systems, but that hope was dashed in many provinces. This led to renewed government restrictions that dampened economic growth and threatened to lead to a double dip in the economy.
Canada, like its international peers, is in for an economic recovery in 2021. Vaccination is proceeding, albeit at a disappointingly slow pace: it is likely to take until the fall for vaccination to be fully completed across the country. However, as the second wave is brought under control, we should see another reopening boost just as we did last spring. As the Canadian economy gradually recovers from the pandemic, we expect to see real growth of 4.2 per cent in 2021 and 4.9 per cent in 2022.
Manitoba’s pandemic experience and prospects
Manitoba’s pandemic experience, and therefore its economic recovery, has played out a bit differently than in most of the rest of the country. During the first wave of the pandemic, Manitoba did relatively well. Case counts were low and Manitoba was able to begin reopening its economy in early May. Restaurants could offer patio dining, elective surgeries resumed, retailers reopened alongside a host of services. By June, many services were restored and gathering limits were increased, precipitating a fast - er economic recovery than we saw in other parts of the country. The second quarter decline in economic activity was likely far less than that for Canada as a whole.
The second wave of the pandemic, however, hit Manitoba earlier and harder than many other parts of the country. With case counts rising rapidly as temperatures cooled, the Manitoba government was forced to implement some of the tightest restrictions on activity the country had seen since the spring. On November 12, the entire province moved into the red zone of restrictions, closing in-person shopping at non-essential retail businesses and most services while also imposing restrictions on gatherings. Regulations were further tightened just eight days later to limit outdoor gatherings to only five people and retailers that remained open were prohibited from selling anything that wasn’t deemed essential. These restrictive measures only began to loosen towards the end of January, with a further easing of restrictions in mid-February. The imposition of these public health measures will weigh on Manitoba’s economic performance in the fourth quarter of 2020 and into the first quarter of 2021.
Employment fell sharply in March and April, but rebounded strongly from May to September before pulling back in the last three months of the year, when the second wave hit. Overall, employment was down by 3.7 per cent in 2020, by far the largest drop on record. Nevertheless, this decline was the third smallest across the provinces.
With Manitoba reopening earlier than many other provinces in the spring of 2020, the retail and manufacturing sectors also performed relatively well. As of September, retail sales in Manitoba had posted the second strongest rebound across provinces from pre-pandemic levels. But with employment beginning to decline in October, retail sales did too, dropping modestly in October and more significantly in November. Even with those declines, they remained 3.4 per cent above their February level. While the manufacturing sectors in most provinces are still striving to recoup pandemic loses, by November, Manitoba’s manufacturing sales were 6.3 per cent above their February levels due to strong growth in the food manufacturing subsector.
As was the case across Canada, Manitoba experienced a sharp decline in activity in high-contact service sectors such as accommodation and food services, and arts, entertainment and recreation, in 2020. On the positive side, GDP in the utilities, public administration and the finance, real estate and insurance industries are expected to have held up well in 2020. Looking forward to 2021, we expect to see broad-based growth as industries that were pummeled in 2020 bounce back. Particularly strong gains are expected in the service sector as restrictions are eased. Additionally, manufacturing is in for a double-digit gain in 2021 as the massive new pea processing plant near Portage la Prairie begins operations. However, the outlook is not all bright, with engineering construction expected to fall as work has fin - ished on the Great Northern Transmission Line and is winding down on the large Keeyask dam.
Overall, Manitoba’s economy is expected to have declined by 5.5 per cent in 2020. However, with restrictions now beginning to ease, the province is poised for a large rebound starting in the second quarter of 2021. Growth will continue over the course of the year, lifting the economy by 4.3 per cent. This will bring employment up by just over 40 thousand and drop the unemployment rate to 6.1 per cent from an average of 7.9 per cent in 2020.
Outlook shaped by legacies of the pandemic
The post-pandemic outlook has many dimensions.
First, it will take a few years to recover the damage that has been done to the economy and the labour market. This means there will be considerable slack in the economy, represented by an elevated unemployment rate and underutilized plants and equipment. This will keep inflation under wraps and means that federal and provincial governments will want to provide stimulus to accelerate the recovery. It also implies that the Bank of Canada is unlikely to raise interest rates for a couple of years. So, low interest rates and concerns about high government indebtedness will persist. Eventually, governments will need to rebalance their finances, but fiscal restraint is likely a story for 2022 or beyond.
Second, the pandemic has had a varied impact on industries. This is sometimes referred to as a K-shaped recession and recovery, because some industries have been resilient while others have been particularly hard hit.
Third, the pandemic has accelerated the impact of the IT revolution. There has been a dramatic shift to digital content, digital delivery and digital investment. For example, e-commerce has soared in retail. The pandemic also caused a shift to remote work. There was a trend in this direction pre-pandemic, but it was accelerated to an incredible degree. The shift to digital and flexible work is likely to persist post pandemic. This will likely impact business models, demand for commercial real estate, consumer behaviour and industry performance.
Fourth, the role of government has drastically increased during the pandemic, and government is likely to be heavily involved in the post-pandemic environment. For example, governments have now become aware of the importance of having some essential products (like personal protective equipment and vaccine production capacity) made domestically.
Governments have also become cognizant of the fact that the recession impacted disadvantaged workers the most, and this has shone a light on the importance of improving economic outcomes of women, visible minorities, immigrants, Indigenous people and youth. There is also continued commitment to move toward a greener, less carbon intensive future. These priorities are likely to have an influence on future government policies, and shape economic outcomes.
Lastly, Canadian households have accumulated a vast pool of savings during the pandemic. Typically, aggregate household savings is about than $30 billion a year. However, the total accumulation of savings is likely to have been roughly $200 billion in 2020. These savings represents the impact of government transfers and the inability of Canadians to spend on things they like or like to do — such as going to movies, eating out at restaurants, or going on international vacations. With consumer spending representing around 60 per cent of GDP, how and when the savings get used will determine the shape of the recovery. But this also leads to a concern. The recovery from the 2008–09 financial crisis was fueled by consumer spending and residential housing, while exports and investment lagged. It is concerning that consumers and residential real estate could once again be the engine of recovery, while commercial real estate, investment and exports provide less lift.
The main message is that there will be long legacies from the pandemic that will shape the global, Canadian and Manitoban economies. The adjustments will have distributional impacts that will need to be assessed and addressed.