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Not everyone will benefit from the same financial cushion to soften the future rise in the cost of money.
All are not equal in the face of inflation, as will be the case with rising interest rates. This mountain of savings accumulated during the pandemic will not bring the same softening effect of the shocks to come for all.
By the end of December, Canadian households had accumulated an additional $ 277 billion in savings since the start of the pandemic, or the equivalent of 12% of GDP. While it is true that this surplus generated by the effect of pandemic wealth is concentrated in the hands of the better-off, it still spills over into all income quintiles. Economists Matthieu Arseneau and Alexandra Ducharme, of the National Bank, calculated that 29.8% of this additional savings are found in the upper portion with an average disposable income of households of $ 183,000 and 24.6% in that of the 107 $ 000. The so-called lower quintiles thus claim nearly 46% of the excess savings released during the health crisis, i.e. 19.3% for the portion of the average disposable income of households of $ 80,000, 14.7% for that of the 58,000. $ and, finally, 11.6% for the $ 30,000 bracket.
But not all will benefit from the same financial cushion to soften the coming rise in the cost of money. Already, the value of this additional savings is being eroded by high inflation, which is felt more in the lower quintiles. National economists cite a Boston Federal Reserve study indicating that in the United States the marginal propensity to consume drops from 97% in the smallest portion to 48% in the upper segment, a gap that would not be so much different in Canada. And this lowest tranche allocates proportionately more resources food, shelter and other current expenses that meet basic needs – where inflation hits the hardest – than discretionary services and spending.
Vulnerability of under 30s
This vulnerability of the bottom quintiles to the expected rise in interest rates also extends to those under 30. Hélène Bégin, Senior Economist at Desjardins Group and Lorenzo Tessier-Moreau, Senior Economist, come back to this paradoxical dimension of the pandemic which has led to an increase in financial and real estate assets faster than that of debts, resulting in an increase in household net worth. “This improvement has affected all age groups and every income bracket, for both renters and landlords,” they say in a recently released study.
But contrasts quickly appeared. Borrowers aged 40 and over have largely used some of the additional savings to reduce their non-mortgage debt. The youngest have, on the whole, released more savings, without reducing these debts, most of the surplus having been directed towards real estate for those who have acquired the property. In short, people under 30 increased both their mortgage debt and other types of borrowing in 2020, and at a faster rate than their income. “Unsurprisingly, monthly debt repayments monopolize a larger share of the income of young borrowers,” who thus become more vulnerable to unforeseen events.
For all Quebecers, at the end of 2020, 6.8% of borrowers exceeded the critical threshold of the debt service ratio assessed at 40%, and 5% had a qualified-at-risk ratio of between 30% and 40%.
And Desjardins economists add that the portrait has already changed in 2021, with debt growth accelerating, while incomes have increased only slightly due to more targeted government assistance and the end of several programs.
Not to mention that we are not immune to a stock market correction and a deflation in house prices in 2022.
Erosion of purchasing power
Inflation is added to the equation, the wage adjustment resulting from the labor shortage still not making it possible to compensate for the loss of purchasing power caused by a rise in consumer prices, measured at 4.7% in November. In its data released Friday, Statistics Canada points out that the average hourly wage rose 2.7% year-over-year in December, an increase similar to the average wage growth observed from 2017 to 2019 (+ 2.6%). The impact on average hourly wages of changes in job composition, measured at the start of the pandemic, also appears to have dissipated. “In December 2021, for a third month in a row, 12-month wage growth was essentially the same, regardless of whether the workforce was kept constant (+ 2.6%) or if no controls were made. ‘was applied (+ 2.7%). “
As for the rate outlook, remember that in the United States, the majority of the members of the Federal Reserve’s Monetary Committee are now forecasting three rate hikes of a quarter of a percentage point each in 2022, a similar scenario in 2023 and two hikes in 2024. which would push the Fed’s target rate above 2%. In Canada, the central bank might make its first hike in March, believe economists from the National Bank, who expect the imposition in 2022 of five increases bringing the target rate to 1.5%, subject to the evolution epidemiological.
