In the first quarter of 2024, Canada’s household savings rate surged to 6.9 percent, a peak not reached since 1996, excluding the pandemic period. This rate represents the proportion of disposable income that Canadians save. During the pandemic’s peak in the second quarter of 2020, savings soared to an unprecedented 26.5 percent due to lockdowns and a drastic drop in consumption. However, this rate fell quickly afterward and has been rising again since the latter half of 2023.
The current savings rate significantly exceeds the pre-pandemic levels of 2019, which ranged between 1 and 2 percent. Economists offer two primary explanations for the recent increase in savings. First, wage growth has recently surpassed the rate of inflation, increasing Canadians’ disposable income. “Previously, higher inflation was eroding earnings, but now that inflation has moderated and wages have increased more rapidly, Canadians have more disposable income.”
The second explanation is a more cautious view: Canadians may be saving more out of concern for an impending economic downturn. “On a less optimistic note, people might be saving more because they’re worried about the economy, high debt levels, and elevated interest rates. Historically, savings rates have risen during weaker economic periods.” Canada’s unemployment rate rose to 6.4 percent in June, and there are indications of a slowing economy.
Recent data from retail trade and the Bank of Canada’s business outlook survey reveal that Canadians are reducing discretionary spending. Moreover, high debt levels persist, with Canada’s debt-to-income ratio reaching 180 percent, the highest in the G7. The increased savings rate is not uniform across all age groups. While younger Canadians generally save more, the recent increase in savings is notably driven by older Canadians aged 65 and above. “The dissaving rate among older households has improved significantly from negative 29 percent two years ago to negative 16 percent today.” Higher interest rates have substantially boosted their income, leading to increased savings as their consumption has not risen proportionately.
