Canadian households are still hanging onto cash, or can’t find a place to spend it at least. Statistics Canada (Stat Can) data shows the household savings rate fell from record levels in Q3 2020. While the rate is off of record highs, it’s still higher than anything Canada’s seen since the early 90s.
Household Savings Rate
The household savings rate is the disposable income left after all consumption. It’s a good idea to have some savings, but a sudden swing higher or lower can be problematic for the economy. Savings generally rise during periods of uncertainty, like a recession. While it’s great to see people prepare, it drives consumption lower. That drop in consumption tends to make things worse, by reducing money flowing into the economy. The opposite is also true.
When the savings rate falls, people are becoming more comfortable with the economy. If it falls too much, people are inadequately prepared for a recession. The rate itself isn’t as important, so much as how quickly it’s changing. Fast increases or decreases, tend to make booms and busts larger.
Canada’s Household Savings Rate Is Growing At Early 90s Levels
Canada’s household savings rate is at the second highest level since the early 90s. The rate reached 14.6% in Q3 2020, down 12.9 points from the previous quarter. Even with the massive dip, the rate is up 912.5% from the same quarter last year. A good portion was retraced from the previous quarter, but it’s still much higher than usual. Prior to those prints, the savings rate was last this high in the early 90s, when interest rates were much higher.
Canadian Household Savings Rate
The seasoanlly adjusted rate of household savings.
The recent surge in the savings rate is a combination of declining consumption, and rising government transfers. Employee compensation dropped 8.9% in Q2, and another 3.1% in Q3. This would normally make it difficult to save more, but a shuttered economy dropped consumption. Government transfers also nearly doubled the amount of income lost in Q2. In Q3, those transfers have dropped 24.3%, trimming some of the “excess” cash. The decline in transfers is a major contributor to the sudden drop in the rate. This trend is likely to persist as the economy approaches normalization.
The takeaway? Households are flush with cash, and unable to spend it – although the rate should continue falling. Households have been receiving generous government transfers, which helped build a savings pool. As those programs die down, it’s likely we’ll see the savings rate still elevated, but closer to historic norms. How long households plan on holding on to that safety net, and where they’ll spend it, is the real question.
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This content was originally published here.