This text is part of the special Personal Finance section
The rising cost of living and rising interest rates are putting pressure on the personal finances of Quebec households. With an economic slowdown looming, should they fear that the situation will get worse?
Despite recent increases in the Bank of Canada’s main key rate, from 0.25% to 5.00% between March 2022 and July 2023, inflation is stubbornly stubborn. In Quebec, the consumer price index (CPI) increased by 4.2% in October compared to the same month last year, more than the Canadian average of 3.1%. The cost of housing increased by 9.1% in Quebec and the price of food continues to rise.
“Wages have not increased at a rate that allows a complete recovery of the purchasing power lost due to inflation, and it is difficult to think that they will do so in 2024,” notes Pierre-Carl Michaud , professor at HEC Montréal and holder of the Jacques-Parizeau Research Chair in economic policies.
Economic downturn
Especially since the economic sky in Quebec is getting a little darker. In his most recent update, the Minister of Finance, Eric Girard, estimated that growth in 2024 would be closer to 0.7% than the 1.4% of his previous forecasts. Public finances could be affected.
This update did not include new checks intended for individuals struggling with the rising cost of living. “The government has maintained the indexation of the tax system, which at least avoids seeing taxpayers’ taxes increase,” underlines Pierre-Carl Michaud. Accompanied by an indexation of social assistance benefits, these measures correspond to an additional average amount of 282 dollars which remains in the taxpayer’s pockets.
The provincial government will also devote $1.8 billion over five years to the construction of 8,000 new social and affordable housing units and will help certain households find housing. On November 21, the government also announced a 4.4% increase in Quebec Pension Plan pensions.
For its part, in its update of November 21, the federal government provided additional funding of $15 billion to build rental housing, in addition to $1 billion over three years for affordable housing projects. Measures which will come into force in 2025-2026. He also created a “Canadian mortgage charter”, which aims to ease the mortgage burden on homeowners in difficulty.
Stress on debts
Louis Lévesque, president of the Public Policy Committee of the Association of Quebec Economists, emphasizes that the current context affects borrowers and savers very differently. “Rising interest rates increase mortgage payments and the cost of debt, but also increase returns on safe investments,” he explains. Suddenly, guaranteed investment certificates and bonds are back in fashion.
Of course, we must put this increase in yields into perspective in relation to inflation. An investment that offers 4.5% interest per year, when inflation exceeds 4%, barely protects your purchasing power. “However, those who buy securities today that provide these returns over several years could potentially be winners if inflation subsides and interest rates fall again,” specifies Louis Lévesque.
Conversely, financial markets are suffering from rising interest rates and economic uncertainties, linked in particular to geopolitical tensions such as the wars in Ukraine and the Gaza Strip and the rivalry between the United States and China. In 2022, the main American stock index, the S&P 500, had lost around 20% of its value, while the Canadian S&P TSX index had lost more than 8%. As of November 21, 2023, the American index had caught up (+19%), but in Canada, the recovery remained slow (+3.6%).
Too much debt
If the rise in interest rates has hurt so much, it is because Canadians and Quebecers are very indebted. “It’s really the biggest concern, in my opinion,” says Pierre-Carl Michaud. We play with fire. »
In 2022, debt represented 187% of the disposable income of Canadian households, compared to 100% in Germany and 102% in the United States. Between September 2022 and September 2023, the number of insolvency files filed by Quebec consumers increased by 10.7%, according to the Office of the Superintendent of Bankruptcy.
In this context, curbing inflation becomes imperative. “In the medium term, too high inflation is not good for the government, nor for businesses, nor for individuals,” concludes Pierre-Carl Michaud.
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