Economic Uncertainty Drives Canadian Household Savings to Highest Level Since 1996

The Canadian household savings rate surged to 6.9 percent in the first quarter, reaching levels not seen since 1996, excluding the pandemic period. This rate, which measures the percentage of disposable income that Canadians save, had spiked to 26.5 percent during the pandemic lockdowns in the second quarter of 2020 before declining and rising again in the second half of 2023. 

Currently, the savings rate is significantly higher than the one to two percent observed in 2019. Economists attribute this increase to two main factors: 

Wage Growth Outpacing Inflation 

Firstly, wage growth is now outpacing inflation, giving Canadians more disposable income. “A while ago, inflation was higher than hourly earnings, so it was really hurting people,” explained Brooke Thackray, research analyst at Global X. “Now, just recently because inflation has come down, average hourly earnings are above inflation, so there’s been more money for them.” 

Economic Pessimism and Precautionary Savings 

Secondly, there is growing pessimism about the economy, prompting Canadians to save more in anticipation of a potential downturn. “If you want to put a less positive spin on it, you could say that people are spending less because they’re worried about the economy, they’re worried about high levels of debt, they’re worried about high levels of interest rates,” noted Josh Sheluk, portfolio manager at Verecan Capital Management. “Savings rates have tended to rise during weaker periods economically during the last 25 years.” 

Signs of a Slowing Economy 

Canada’s unemployment rate increased to 6.4 percent in June, indicating a slowing economy. Recent retail trade data and the Bank of Canada’s business outlook survey show a reduction in consumer discretionary spending. Additionally, Canadians are dealing with high levels of debt, with a debt-to-income ratio of 180 percent, the worst in the G7. 

Generational Differences in Savings 

Trevor Tombe, an economist and professor at the University of Calgary, points out that the current savings rate varies among age groups. While younger Canadians typically save more, the recent increase is primarily due to older Canadians aged 65 and up. “The dissaving rate among older households has risen significantly from negative 29 percent two years ago to negative 16 percent today,” Tombe explained. “Higher interest rates boost their income considerably, and consumption is typically not going to increase as much, so that just leads to more savings.” 

Tombe added that older individuals tend to hold high-yield investments, while younger people usually carry more debt. This difference creates an unequal impact of interest rates on disposable income across generations. 

Conclusion 

In times of economic uncertainty, making informed financial decisions and managing your savings effectively is crucial. Whether you're looking to maximize your disposable income or prepare for potential economic downturns, Financial First Steps and Smart Money Solutions are here to help. Our expert money coaching services provide personalized strategies to help you achieve your financial goals. Contact us today to start taking control of your financial future. Are you concerned about your savings and financial future? Let us help you navigate these uncertain times with confidence.