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Highly leveraged Canadian households are facing very uncertain and challenging times as a result of the COVID-19 crisis. Anthony Okolie speaks with Ksenia Bushmeneva, Economist, TD Bank, about the impact the pandemic is having on household savings, debt and consumer spending.
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- Ksenia, in your latest report, you provided some very important and compelling insights into Canadian household finances. Can you tell us, how are Canadians doing so far since the start of this crisis?
- Well, Tony, right now we have second quarter data from Statistics Canada on Canadian household balance sheets. And based on that data, Canadian households are actually doing better than one would have imagined at the start of this health crisis.
So one variable, for example, is wealth. We've seen a big decline in wealth in the first quarter of this year. But luckily, wealth has really rebounded and recovered all losses and then some in the second quarter as equity valuations surged and home values have held on to their prices.
Another variable where we've seen growth is disposable income. So that has also surged by 10% in the second quarter. And that has been mostly thanks to unprecedented income support measures rolled out by the federal government, which helped to prop income even as unemployment surged.
Lastly, there's also been a significant slowdown in household debt growth. And that is also important in Canada. As we know, Canadian households are quite leveraged. And debt growth has actually been flat in the second quarter, which is the first time that's happened since data tracking had begun in 1990. So as households have stayed home, they have pared back their consumer spending. And they have also pared back their borrowing.
- So I want to talk a little bit about the debt side, because you mentioned that they've sort of pared back their borrowing. When you look at consumer credit, do you see any significant trends in that data?
- So yes. Consumer credit had actually declined in the second quarter. And that's the main reason why household debt had remained flat and was not growing in the second quarter. And it's not really difficult to see why consumer credit had declined, because it's closely tied to retail activity and retail spending. And that had really took a significant dive in the second quarter as households have been staying home, and as non-essential businesses have been mandated to close.
- As consumers are staying home as well. What's happened to the savings rate? Are Canadians spending less during the crisis?
- Well, as of last quarter, yes. Indeed, Canadians have been spending a lot less. And if we look at savings rate, that had really surged in the second quarter to 28%, believe it or not. And if we compare it to, for example, what it has been in 2019, it was ranging between 2% to 3% in that year. And so that's almost a tenfold increase.
And really, there's been two sides to this. One is the income support measures, which I've mentioned, which really helped to boost the disposable income of households. But also consumer spending had really declined significantly in the second quarter. And so taken together, this really helped to boost the savings rate to this unprecedented level.
- OK, so given all that, the savings rate, the downward trend in debt, what's your outlook for household finances this year into next year?
- So of course, all households are different. But at least in aggregate, given the available data we can see so far, in the early stages of the pandemic-- so the second quarter-- households have fared much better than one would have expected at the beginning. We've seen improvement in many indicators.
Wealth had rebounded. Income growth had accelerated. Some households have been successful at rebuilding their rainy day funds by cutting back spending and paying down debt. And so all this is very encouraging. And it was good to see.
However, it's important to keep in mind that these improvements have been largely thanks to the unprecedented measures rolled out during this period of time, both by the government, but also the deferrals offered by financial institutions. And it's not really an indicator of the health of the labor market, which tends to usually determine the health of the household finances.
And if we look at the labor market, that actually remains quite weak. And unemployment remains in the double digits. So all that's to say is that so far so good. And households have weathered the early stages of the pandemic in good shape. However, as we move forward and these income supports, these extraordinary measures, diminish, we expect that households will face a more challenging environment next year.
- Ksenia, thank you very much for your time.
- You're very welcome, Tony.
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- Ksenia, in your latest report, you provided some very important and compelling insights into Canadian household finances. Can you tell us, how are Canadians doing so far since the start of this crisis?
- Well, Tony, right now we have second quarter data from Statistics Canada on Canadian household balance sheets. And based on that data, Canadian households are actually doing better than one would have imagined at the start of this health crisis.
So one variable, for example, is wealth. We've seen a big decline in wealth in the first quarter of this year. But luckily, wealth has really rebounded and recovered all losses and then some in the second quarter as equity valuations surged and home values have held on to their prices.
Another variable where we've seen growth is disposable income. So that has also surged by 10% in the second quarter. And that has been mostly thanks to unprecedented income support measures rolled out by the federal government, which helped to prop income even as unemployment surged.
Lastly, there's also been a significant slowdown in household debt growth. And that is also important in Canada. As we know, Canadian households are quite leveraged. And debt growth has actually been flat in the second quarter, which is the first time that's happened since data tracking had begun in 1990. So as households have stayed home, they have pared back their consumer spending. And they have also pared back their borrowing.
- So I want to talk a little bit about the debt side, because you mentioned that they've sort of pared back their borrowing. When you look at consumer credit, do you see any significant trends in that data?
- So yes. Consumer credit had actually declined in the second quarter. And that's the main reason why household debt had remained flat and was not growing in the second quarter. And it's not really difficult to see why consumer credit had declined, because it's closely tied to retail activity and retail spending. And that had really took a significant dive in the second quarter as households have been staying home, and as non-essential businesses have been mandated to close.
- As consumers are staying home as well. What's happened to the savings rate? Are Canadians spending less during the crisis?
- Well, as of last quarter, yes. Indeed, Canadians have been spending a lot less. And if we look at savings rate, that had really surged in the second quarter to 28%, believe it or not. And if we compare it to, for example, what it has been in 2019, it was ranging between 2% to 3% in that year. And so that's almost a tenfold increase.
And really, there's been two sides to this. One is the income support measures, which I've mentioned, which really helped to boost the disposable income of households. But also consumer spending had really declined significantly in the second quarter. And so taken together, this really helped to boost the savings rate to this unprecedented level.
- OK, so given all that, the savings rate, the downward trend in debt, what's your outlook for household finances this year into next year?
- So of course, all households are different. But at least in aggregate, given the available data we can see so far, in the early stages of the pandemic-- so the second quarter-- households have fared much better than one would have expected at the beginning. We've seen improvement in many indicators.
Wealth had rebounded. Income growth had accelerated. Some households have been successful at rebuilding their rainy day funds by cutting back spending and paying down debt. And so all this is very encouraging. And it was good to see.
However, it's important to keep in mind that these improvements have been largely thanks to the unprecedented measures rolled out during this period of time, both by the government, but also the deferrals offered by financial institutions. And it's not really an indicator of the health of the labor market, which tends to usually determine the health of the household finances.
And if we look at the labor market, that actually remains quite weak. And unemployment remains in the double digits. So all that's to say is that so far so good. And households have weathered the early stages of the pandemic in good shape. However, as we move forward and these income supports, these extraordinary measures, diminish, we expect that households will face a more challenging environment next year.
- Ksenia, thank you very much for your time.
- You're very welcome, Tony.
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