Strong jobs market and savings built up since the pandemic spur consumer spending
OTTAWA—As the Bank of Canada raised its trend-setting interest rate to 5 percent on July 12, it noted that households are on average in better financial shape than some reports might suggest.
Bank of Canada senior deputy governor Carolyn Rogers said the central bank wanted to take a “deeper dive” into the data when faced with reports like ones from insolvency firm MNP Ltd. that say that 52 percent of Canadians are $200 away or less from not being able to pay their monthly bills.
In an analysis of household financial wealth, the BoC said, “The financial positions of many households remain healthy, due in part to strong labour markets and the buildup of large liquid savings” since the start of the pandemic.
“You can see three-quarters of households have accumulated quite a bit more savings than they had prior to the pandemic. … People are confident about their jobs and their income and many are seeing wage increases,” Rogers said in response to a question from The Epoch Times.
“I think those two things are contributing both to reducing the financial stress for some.”
The portion of households experiencing considerable financial stress is smaller, the bank said.
“For many, larger savings may be acting as a buffer and supporting consumer spending,” Bank of Canada governor Tiff Macklem said in his opening remarks at the bank’s press conference.
More pain for households will come when borrowers renew their mortgages, as only about a third of mortgage holders have been directly affected by higher rates to date, according to the BoC.
Thus, the BoC says financial stress is not broad-based and overall delinquency rates on loans remain relatively low. But credit card data shows that borrowers are using them more extensively than they have in the past.
Jean-Paul Lam, University of Waterloo economics professor and former Bank of Canada assistant chief economist, told The Epoch Times that the BoC’s household analysis “looks too good to be true” and that he was “very surprised” at how well households are holding up after 4.5 percentage points of rate hikes prior to the July 12 quarter-point hike.
“We haven’t seen the full impact of interest rates on households, especially because a lot of us have mortgages that are fixed,” he said. “If interest rates stay high for the next year, year-and-a-half, which seems to be the case, then I think the numbers might deteriorate very, very quickly.”
With a BoC overnight rate target of 5 percent, some of the big Canadian banks promptly raised their prime rate to 7.2 percent. This will raise the cost of variable-rate mortgages and lines of credit.
Resilient Consumers and Population Growth
In its July monetary policy report (MPR), the bank listed a number of factors responsible for the “unexpected strength of household spending over the first half of 2023.” These include a strong labour market, immigration, built-up household savings, pent-up demand for services, and governments’ budget spending.
The BoC said that while it expects consumer demand to slow due to interest rate increases, certain data suggests that more persistent excess demand in the economy and that the housing market has “seen some pickup.”
Strong population growth from immigration is adding to both demand and supply in the economy, according to the BoC. More workers ease the tightness in the labour force but newcomers to the country tend to consume more.
Macklem said it’s hard to tell what the impact of the surge of immigration is on inflation.
“On net it’s probably roughly neutral,” he said.
Lam says population growth will put more pressure on demand before raising supply.
“There’s definitely more pressure on housing services and that is a big component of inflation,” he said. “I think what this is translating into right now is a story where … in the short run, it’s more of a demand story than about supply.”
Canada will benefit in the long run from population growth with higher productivity and lower inflation, Lam added.
The labour market showed an increase of 60,000 jobs in June and the uptick in the unemployment rate to 5.4 percent was a result of more people looking for jobs.
While immigration adds to supply in the labour market, Statistics Canada reported that year-over-year average hourly wages increase of 4.2 percent in June was the slowest growth since last May.
The problem is that these wages are not rising as fast as the prices of goods in almost all countries covered by the Organisation for Economic Co-operation and Development (OECD).
In its Employment Outlook 2023 report, the OECD noted that for Canada, wages adjusted for inflation (real wages) fell 2 percent from the first quarter of 2022 to the first quarter of 2023.
The OECD said that low-educated workers in Canada took a bigger hit to real wages than workers with higher levels of education—a development that is unique among OECD countries where the data is available, including the United States.
Stubborn Inflation
The bank’s quarter-point rate hike was widely predicted by economists. However, unlike after the June rate hike, expectations for another rate hike are not as strong.
“We think this will likely be their last hike as inflation and labour markets continue to ease and signs of an emerging recession begin to build,” said Oxford Economics economist Michael Davenport.
Nathan Janzen, assistant chief economist at RBC, pointed to the “hawkish” tone from the BoC and suggested that the central bank left the door open for another rate hike this year.
“They are clearly willing to hike again at the next decision in September if inflation in particular doesn’t show further signs of easing,” he said in a note.
Macklem said the rate hikes are taking their time to affect the economy and that “there’s no easy path to restoring price stability.”
