BMO Economics highlights advantages of pandemic-era savings
Substantial household savings in Canada and the United States could help buttress the North American financial system against the threat of recession in 2023, according to BMO Economics.
In its latest analysis, BMO said that American households have stocked up more than $2.4 trillion in extra cash during the pandemic, while Canadians’ estimated savings stood at around $340 billion, accounting for as much as 23% of disposable income.
“Even allowing for a higher normal saving rate than in the five years before the pandemic — say 7.7% as per the mean since 1961 — some excess savings would persist for six more years at current rates of spending,” BMO said.
In both Canada and the US, majority of the surplus cash was in bank deposits, “though a large amount was likely used for purposes other than consumption, notably to invest in term deposits,” BMO said.
This war chest will prove to be a valuable resource this year, especially considering the prevailing instability in global markets.
“Due to this buffer, many analysts, including ourselves, think the US and Canadian economies will avoid a hard landing, despite more than 4% of policy rate hikes in under a year,” BMO said. “However, the unequal distribution of savings will also impact the economy, lenders, and retailers.”
In particular, the significant increase in the cost of necessities has taken “a severe toll” on the savings of Canada’s low-income earners.
“For the bottom 40% of income earners, net savings shrank by 12% between 2020 Q1 and 2022 Q3, contrasting with a 34% increase for the second-highest income quintile and a 21% advance for the top income group,” BMO said.
This was supported by a recent Statistics Canada survey, which found that 63% of the lowest-income Canadians were “very concerned” about daily expenses like food, transportation, and shelter.
“Despite holding substantial excess savings, Canadian households are likely to allocate a greater share to repaying and servicing debt, which will help limit defaults but lessen support to the economy,” BMO added.
