We have never really recovered from the rise in prices since the world was deconfined. Neither wages, nor markets, nor supportive policies have managed to get us back on track before COVID-19.
Of course, we consume. But this is nothing like the pre-COVID years, almost four years ago now. Since then, consumption has increased by only 1.5% each year in Canada, while it increased by 2.5% in previous years. In Europe, we can draw the same type of observation. Annual consumption has grown by 0.5% for four years, compared to 1.5% before COVID. Only the United States escapes the rule, with consumption of 2.4% before and after COVID, but at the cost of a drop in the household savings rate to a level that we have not seen since. 15 years old. This means that the American consumer preferred to draw on their reserves rather than curb their spending.
This consumer apathy is mainly explained by the spectacular increase in the cost of living following the deconfinement in early 2021. The prices of goods and services increased by nearly 15% in Canada and Europe, and by 17% in UNITED STATES. In normal times, we would have rather been entitled to an increase of almost 6% in these prices over the same period. We know that energy and food prices have played a significant role in the price surge. However, even excluding energy and food, prices recorded an increase of almost 10% over the period in Canada and Europe, compared to 4% over the same period in normal periods.
Initially, this increase in the cost of living was able to be cushioned by accommodating monetary policies and budgetary policies of whatever the cost type. Central banks have thus lowered their key rate to almost 0%, in order to produce a reduction in the real cost of money likely to limit the loss of confidence of economic agents. On the other hand, governments have increased economic support plans, at the cost of an increase in debt-to-GDP ratios of almost 30% for all countries. But very quickly, monetary policies had to reorient their policy towards restrictive mode in order to fight against inflation. Likewise, the budgetary policies of whatever the cost only lasted for a short period of time, with debt levels having reached levels considered critical.
Secondly, it was necessary to take over from wages, but the increases in these wages never made it possible to compensate for the impact of the cost of living on purchasing power. Certainly, tensions on the labor market have rebalanced the balance of power between the employee and the employer, thus motivating a partial indexation of wages to the rise in prices. But the account is not there. Over the period, real wages fell, not rose. An effect all the more marked since, at the same time, labor productivity was hampered by the absence of business investment, and by the maintenance of high business margins.
Finally, there was the income from financial savings which could also have offset the increase in the cost of living. But here again, the observation is disappointing. Diversified portfolios, deemed to be the best able to weather economic cycles without too many shocks, have not done better than inflation. And for good reason, these portfolios are made up almost half of bonds whose value has been heavily penalized by rising rates.
Thus, the Canadian bond market lost nearly –7% over the period, –9% for the American market, and –15% on average for the euro market. These losses were offset by the very good performance of the stock markets, which were not expected to perform so well in such an uncertain environment. The Canadian stock market recorded a performance of nearly 25%, both for the American and European markets. Good performances which, once mixed with the poor performance of the bond markets, produce much more modest performances of diversified portfolios, in fact just equivalent to the increase in the cost of living.
The consumer is doing better, but has not regained his pre-COVID enthusiasm. The inflationary shock will leave traces in memories and in pockets. Ultimately, the restoration of consumer purchasing power will depend on a strengthening of labor productivity and a sharing of added value more to the advantage of the employee. Strengthening productivity could emerge in a scenario where artificial intelligence produces a lasting shift in technical progress. The sharing of added value could become more to the advantage of the employee in a scenario where company margins are finally put under pressure after remaining at historically high levels.