The surplus savings of some 250 to 300 billion accumulated during the pandemic have not been eroded, but their distribution has become highly skewed. As you can imagine, it is now concentrated in the hands of higher-income households.
Nathan Janzen, Deputy Chief Economist of the Royal Bank, calculates that the savings of Canadians accumulated during the pandemic continued to increase to reach 350 billion in the third quarter of 2022. That is roughly $9,000 per capita. That said, inequality has also increased, with lower-income households suffering more from the negative effects of the sharp rise in interest rates and the repercussions of the erosion of their purchasing power.
To explain the amplification of the asymmetry, the economist adds that deposits in checking or current accounts have started to decline, but that this money has been redirected to term deposits, which now offer higher interest rates. students.
It is also expected that these wealthy households will continue to pile up savings. The year 2022 has seen a triple correction in the real estate, stock market and bond markets. During the second and third quarters of last year, this fall in prices reduced more than 1.1 trillion dollars of assets, or almost 20% of the increase in national wealth observed between the start of the pandemic and the peak. January-March 2022. “Spiking interest rates, sharp declines in house prices and falling asset values in financial markets have undermined consumer confidence, which generally leads them to save more, not less,” says the economist.
However, this increase masks a deterioration in the savings rate, which followed the end of government income support programs. This rate fell from 8.1% to 5.7% between the first and third quarters of 2022, to remain above the average rate of 3.5% observed during the ten years preceding 2020, according to the Statistics Canada measures.
Sunken savings
That said, high-income Canadians are snapping up the lion’s share of these savings. “Rising inflation and debt payments have already eaten up the modest savings of low-income households. This trend is expected to continue as these households borrow more to pay for essential goods and services,” writes Nathan Janzen.
The continued rise in the cost of living, even in a context of slower inflation growth, and the lagged effect of rising interest rates will remain dominant in 2023. Moreover, the economist from the Royal predicts that the weight of debt repayment will monopolize 16% of household disposable income by the end of the year. A record! This pressure will be felt more by lower-income households. Especially since “rather than saving more during the pandemic, low-income households have simply borrowed less”.
Nathan Janzen quotes data from Statistics Canada indicating that the average saving per household among the 40% of people with the lowest incomes was already negative in the first quarter of 2020. “In the third quarter of 2022, it fell by 12% more than these levels, due to the increase in the cost of living. By comparison, the savings of the 40% of people with the highest incomes increased by 28% during the same period. »
Rapid rise in insolvency
Meanwhile, the latest statistics from the Office of the Superintendent of Bankruptcy (OSB) show that in the 12-month period ending December 31, 2022, the total number of insolvency cases increased by 11, 9% compared to the corresponding period ended December 31, 2021. The number of cases increased by 37.2% among businesses and 11.2% among consumers. This last figure contains a 10.5% drop in the number of bankruptcies, but a 20.7% increase in the number of consumer proposals made to creditors.
In the 12-month period ending December 31, 2022, the proportion of insolvent consumers opting for a proposal increased to 75.5% from 69.5% for the same period a year earlier. The BSF adds that 96.7% of all insolvency cases were filed by consumers during these periods.
In Quebec, the total number of insolvency files reached 27,378, up 8.7% compared to the 12-month period ended December 31, 2021. The increase was 27.1% among businesses, 7.5% among consumers. For the latter, the same observation, the increase in proposals to creditors was 20.5% and the drop in bankruptcy cases was calculated at 17.2%.
But this gap between proposals and bankruptcies could narrow, or even reverse during the course of 2023. Record level of household debt service and reduction in disposable income rhyme with an increase in the default rate.
Rising interest rates and the end of emergency measures, in the form of financial support from governments and relief from financial institutions, fueled a sharp increase in the number of proposals to creditors. “Bankruptcies will soon follow this movement”, have already written the economists of the Mouvement Desjardins.