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Estimates of pandemic savings ‘vastly’ overstated, say economists
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Good morning!
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Much has been made of the vast trove of savings Canadians built up during the lockdowns of the pandemic.
In its last monetary policy report, the Bank of Canada said the economy was not cooling as quickly as expected because this mountain of money “may be acting as a buffer and supporting consumer spending.”
But not all economists see it that way.
Oxford Economics believes most measures of excess savings from the pandemic “vastly overstate” the support they will give to consumer spending in months ahead.
Oxford economist Michael Davenport estimates households have just over $200 billion, or 7.3 per cent of GDP, in extra savings, much smaller than common estimates in the range of $280 billion to $350 billion.
Furthermore, he thinks only $75 billion is liquid cash that will be spent.
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Oxford says most measures don’t consider that households were under-saving in the years leading up to the pandemic and fail to adjust for the amount already spent paying down debt, on international travel or investing in assets such as housing, stocks, bonds and crypto.
Others used the savings windfall to strengthen their retirement portfolios. Between 2019 and 2021, RRSP contributions grew by 27 per cent and were $10 billion higher than the long-term trend would suggest, said Davenport.
You also have to consider who is holding this wealth.
In 2020, the top two income groups in Canada held 58 per cent of the excess savings and the bottom two about 27 per cent. By 2022, the share held by higher income households had grown to 66 per cent while the share in lower-income households had shrunk to 19 per cent.
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Lower-income Canadians have been forced to give up more of their savings as inflation and higher interest rates made the cost of living more expensive.
“With high-income households now holding about two-thirds of excess savings, it means there’s a lower likelihood they will be used to finance future spending,” said Davenport.
There is also the argument that inflation and population growth are artificially inflating these savings figures, say National Bank of Canada economists Matthieu Arseneau and Alexandra Ducharme.
To get a better idea of how much money is available to spend, they charted the progression of checkable and at notice deposits. As their chart below shows these deposits are only 7 per cent higher than before the pandemic when inflation and population growth is taken into account.
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“In our view, if consumers had a windfall of savings to spend, it is unlikely that per capita consumption would have fallen since the Bank of Canada began raising interest rates last year,” said the National team. “Perhaps households have reasons not to see their savings in the governor’s way, especially in a context where the unemployment rate is rising.”
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Here’s an update from south of the border.
The Inflation Reduction Act, the bill that allocates money to green energy projects and emissions reduction in the United States, has created 90,000 new jobs and invested $130 billion in 270 new clean energy projects since it was passed a year ago, according to the strategists at BofA Global Research. Half of this money was for new renewable energy projects (mostly in the south and midwest), representing 25 gigawatts of capacity, enough to power over 22 million homes. More than 40 per cent of American energy jobs are now in the clean energy sector.
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BofA says the sectors that stand to benefit the most from the IRA are clean energy, transportation, and manufacturing, with Ford, GM, Honeywell and Caterpillar among the stocks to watch.
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The investment industry’s preoccupation with predicting the stock market is leading to poor investment decisions, says investing veteran Tom Bradley. He explains why no one can predict, with any precision or consistency, what the stock market will do in the next few months or years and what investors should be focusing on instead. Read more
Bank of Canada should stop hiking rates now: Benjamin Tal
Consumer spending seen softening in second half
Why higher interest rates could be bad for workers
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Today’s Posthaste was written by Pamela Heaven, @pamheaven, with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.
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