A number of clouds are looming over Canadian households, which will make it difficult to further grow their net wealth, a new report from Desjardins says.
The report, led by Senior Director of Canadian Economics Randall Bartlett, painted a picture of how ultra-low interest rates and generous government support programs helped bolster incomes and asset prices during the COVID-19 pandemic, and now, Canadians will have to adjust to many of those trends reversing course.
“With the value of many assets at risk and liabilities increasing for Canadian households, the outlook for wealth looks bleak,” the report said.
Desjardins is expecting growth in disposable incomes to moderate from the unusually high levels seen during the pandemic but still remain strong, thanks to a robust labour market and higher wages.
However, asset growth in Canada has mainly been in the form of home prices and stock market gains, which have been declining in the wake of higher interest rates. Meanwhile, the purchasing power of Canadians’ savings are being eroded by inflation.
“While real estate is the most important asset held by a majority of Canadian households, the debt incurred to buy that asset is also their biggest liability,” the report said.
“While the value of assets can fluctuate, debt tends to stick around. Inflation does help reduce the relative importance of debt, but because it leads to higher interest rates, there will be more pain ahead.”
As higher debt servicing costs and the rising cost of living eat into a larger portion of household incomes, Desjardins said it expects consumption — a major economic driver in Canada — to slow this year.
The Bank of Canada, along with many other major central banks, has been aggressively hiking rates to combat inflation. However, those rate increases are now coming against the backdrop of fears over a potential recession.
Desjardins is expecting the Bank of Canada to have to roll back some of those hikes before the end of 2023.
“As the Bank of Canada takes its foot off the brake as economic activity slows, asset values and wealth should stabilize at a level that is more typical of a balanced economy,” the report said.
However, it added that by the end of this “unusual economic and financial cycle, the massive wealth accumulated by Canadian households will most likely have shrunk, at least in real terms.”