Canadians are saving like they haven’t in decades

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Canadian household savings rate rises 6.9 percent In the first quarter, barring a pandemic, levels not seen since 1996.

The savings rate measures the amount Canadians set aside from their disposable income, expressed as a percentage. As the pandemic forced Canadians into lockdowns and consumption binges, the rate rose to extraordinary levels, reaching 26.5 percent in the second quarter of 2020. But it fell sharply in the second half of 2023 and before starting to climb again this year.

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The current savings rate is higher than 2019 levels, when it was between one and two percent.

Economists have offered two explanations for the recent run-up, the first being that wage growth is now outpacing the rate of inflation, giving Canadians more disposable income.

„Not too long ago, inflation was higher than hourly earnings, so that’s really affecting people,” said Brooke Thackeray, research analyst at Global X. „Now, because inflation is down, average hourly earnings are higher than inflation, so they have more money.”

The other explanation is that Canadians are pessimistic and preparing for a possible economic 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 interest rates,” said Josh Sheluk, portfolio manager at Veregon Capital Management. „Savings rates have been rising during economically weaker periods over the past 25 years.”

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Canada’s unemployment rate rose to 6.4 percent in June and there are signs the economy is slowing.

Recent retail sales data and the Bank of Canada’s business outlook survey show that Canadians are pulling back on consumer discretionary spending. In addition, Canadians struggle with high levels of debt, with Canada’s debt-to-income ratio reaching 180 percent, the worst in the G7.

Trevor Dombey, an economist and professor at the University of Calgary, argues that current savings rates are uneven across age groups in Canada. While younger generations of Canadians generally save more, Dombey says Canadians aged 65 and over are the biggest contributors to this recent uptick.

„The frustration rate among older households has risen from a negative 29 percent two years ago to a negative 16 percent today,” Dombey said. „Higher interest rates raise their incomes significantly and consumption is generally not going to increase and therefore lead to more savings.”

Dombey said older people hold higher-yielding investments and younger people generally carry more debt, creating an uneven story when it comes to the impact interest rates have on disposable income across generations.

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