Rising wages and economic concerns boost Canadian household savings rate to 6.9% in Q1
The Canadian household savings rate rose to 6.9 percent in the first quarter, a level not seen since 1996 (excluding the pandemic), according to Financial Post.
The savings rate, which measures the percentage of disposable income that Canadians save, had surged to 26.5 percent during the pandemic lockdowns in the second quarter of 2020 before declining and then increasing again in the second half of 2023.
Currently, the savings rate is significantly higher than the one to two percent observed in 2019. Economists attribute this rise to two main factors. Firstly, wage growth is now surpassing inflation, providing Canadians with more disposable income.
“A while ago, inflation was higher than hourly earnings, so it was really hurting people,” said Brooke Thackray, research analyst at Global X. “Now, just recently because inflation has come down, average hourly earnings are above inflation, so there’s been more money for them.”
Secondly, there is growing pessimism about the economy, leading Canadians to save more in preparation for a potential downturn.
“If you want to put a less positive spin on it, you could say that people are spending less because they’re worried about the economy, they’re worried about high levels of debt, they’re worried about high levels of interest rates,” noted Josh Sheluk, portfolio manager at Verecan Capital Management.
“Savings rates have tended to rise during weaker periods economically during the last 25 years.”
Canada’s unemployment rate increased to 6.4 percent in June, suggesting a slowing economy. Recent retail trade data and the Bank of Canada’s business outlook survey indicate a reduction in consumer discretionary spending.
Additionally, Canadians face high levels of debt, with a debt-to-income ratio of 180 percent, the worst in the G7.
Economist and professor Trevor Tombe from the University of Calgary highlights that the current savings rate differs among age groups. While younger Canadians usually save more, the recent surge is primarily due to older Canadians aged 65 and up.
“The dissaving rate among older households has risen a lot from negative 29 percent two years ago to negative 16 percent today,” Tombe explained. “Higher interest rates boost their income considerably and consumption is typically not going to increase as much, so that just leads to more savings.”
Tombe added that older individuals tend to hold high-yield investments, whereas younger people typically carry more debt. This difference creates an unequal impact of interest rates on disposable income across generations.
