Wealthier Canadians are feeling less prosperous and their dented confidence is showing up in rising levels of savings among the top 40 per cent of earners, according to a RBC Economics report released on Jan. 25.
A historic pile of pandemic savings continued to swell late last year, hitting $350 billion in the third quarter of 2022 from $300 billion at the outset of the pandemic, fuelled mostly by Canada’s wealthiest citizens, who appear to have lost faith in equities and housing, according to economists Claire Fan and Nathan Janzen.
Citing data from Statistics Canada, they estimate savings among the top 40 per cent of earners rose 28 per cent from the first quarter of 2020 to the third quarter of 2022. And “these higher-earning households will likely continue to save,” the pair said in the report, because their consumer confidence has been shaken. “Lower consumer confidence typically leads to more saving, not less.”
The economists said data indicates chartered bank demand deposits — savings, chequing and money market accounts — have started to decline, but the money is being shifted into term deposits, which pay a greater return in exchange for the cash being locked in for a certain period of time.
Apparently, financial anxiety can strike in any income bracket and wealthier Canadians have had plenty of reason to harbour some money fears. According to a previous RBC estimate, “more than $1 trillion in assets were wiped out over the second and third quarters of last year as housing and financial markets retrenched.”
Rising interest rates, climbing a total of 425 basis to 4.5 per cent on Jan. 25 from 0.25 per cent in March 2022, are a prime reason for the wealthiest’s declining fortunes. The end of cheap money also helped push down the average national home price by 12 per cent in 2022, the Canadian Real Estate Association said earlier in January. The S&P/TSX composite index pulled back 8.7 per cent for the year, although it was down more than 14 per cent at its nadir in 2022.
Nevertheless, Canadians’ net worth remains higher than pre-pandemic levels, even though they feel “much less wealthy,” the RBC economists said.
Aside from the size of the savings hoard — 4.5 years’ worth of “pre-pandemic spending on food and restaurants” — Fan and Janzen noted that the boom in discretionary spending when the economic gates were thrown open appears to have been funded by income earnings.
“This was enabled by a rapid recovery in labour markets in the first half of the year, which offset the wind down of government aid,” they said.
The economy created a net total of 381,000 positions in 2022, TD Economics said following the release of employment numbers for December and the year by Statistics Canada. The jobs data also showed that the average hourly wage continued to rise, increasing 5.1 per cent year over year.
But with so much undeployed cash still on the sidelines, Fan and Janzen worry that unleashing it would just delay the inevitable and lead to higher inflation, higher interest rates and possibly a worse recession.
The consumer price index indicates “excess demand” remains, backed, for example, by elevated prices for services. Other surveys, including the Bank of Canada’s outlook survey, show that employers are still having trouble hiring workers.
“As we noted in previous work, household net worth — which spiked during the pandemic — is now shifting from a driver to a drag on spending growth,” Fan and Janzen said.