Saving grace

A couple of months ago, Justin Trudeau defended his Government's massive spending on pandemic relief by saying "the Government is going into debt so Canadians don't have to". This was met with howls of outrage and scorn from the "all debt is debt" crowd, but data published by Statistics Canada today seem to bear out what Trudeau said.

The data in question form part of the quarterly report on Canada's National balance sheet and financial flow accounts, and relate to the second quarter of this year, when the impact of the pandemic was at its worst. The financial flow accounts can be baffling, but on this occasion StatsCan has provided a detailed commentary on the household sector, where there have been some surprising and indeed unprecedented developments. Some highlights:

• Household income rose 10.8 percent in the quarter, as government support programs easily outweighed the loss in conventional employment income.
• Household spending fell 13.7 percent in the quarter, no doubt reflecting, at least in part, the absence of many of the things that people habitually spend money on.
• As a result of these income and spending changes, the household savings rate jumped to 28.2 percent in the quarter -- in Q4/2019 it had been a mere 3.6 percent!
• Household net worth grew by a record 5 percent in the quarter after a record decline in the first three months of the year.
• Consumer borrowing in credit markets was only $0.9 billion in Q2, down from $26 billion in Q1.
• The household debt service ratio (interest and required principal payments) fell to 12.4% from 14.5% in the prior quarter, a record decline. Lenders' temporary deferrals of required principal payments were a key factor here. 
• The household debt to disposable income ratio fell to 158 percent from 175 percent in the prior quarter. This is a somewhat odd statistic, in that it compares a stock (debt) to a flow (income), but it has been widely followed because it has been rising steadily since the Global Financial Crisis, raising fears about the ability of the household sector to deal with an economic crisis.

These are extraordinary numbers and StatsCan is careful to qualify them. Most notably, it warns that the figures are aggregates across the whole economy.  In normal times, higher income groups unsurprisingly tend to have higher savings rates and lower debt burdens than lower income groups. To the extent that government pandemic relief efforts were directed towards the most vulnerable households, this historical pattern may have been altered somewhat in Q2. Even so, it is unlikely that the remarkable improvement in households' aggregate financial position in the quarter was shared equally across all income groups.  

Will all of these trends persist?  It seems unlikely.  Both government income support programs and lenders'  mortgage deferrals are set to wind down. Opportunities for spending are steadily increasing as lockdowns are relaxed, so there is certain to be some catch-up self-gratification spending in the months ahead, barring a second COVID wave of such severity that restrictions are reimposed. It may be that some Canadians have been weaned off their debt addiction by the pandemic, but it seems likely that the abrupt turnaround in household finances is just one more effect of the pandemic that will fade away when more normal conditions return.