Fiscal transfers have strongly supported Canadian household incomes during the pandemic. What happens when all of the government supports end? The answer depends heavily on what Canadians choose to do with their savings.

Despite the steep economic downturn last year, family incomes in Canada have been strongly supported during the Covid crisis. 

As the following chart created by the National Bank illustrates (June 21, 2021), household disposable income in Canada soared during the Covid pandemic in 2020 and 2021.  

Indeed, growth in Canadian disposable income was far higher than normal pre-pandemic growth patterns would have predicted. Of course, the huge expansion in incomes during the pandemic was entirely due to the huge Canadian government fiscal transfers to households. Canada’s income transfer payments not only sustained household incomes but were instrumental in supporting the entire economy after its huge decline early in 2020 due to the pandemic and lockdowns. 

Household savings is defined as the amount of disposable income which is left over after consumer spending is accounted for. The savings rate simply represents total savings as a percentage of net household disposable income. In other words, the savings rate represents how much Canadian households are saving out of current income.

Obviously, the higher the saving rate, the lower the amount of consumer spending. Of course, the opposite is also the case.

Unfortunately, most of the hefty income support programs that were so effective during the pandemic are scheduled to end in the coming months. As the National Bank article indicated, Canada’s Emergency Wage subsidy ended as of June, while the Recovery Benefit is set to finish in September.

The real question now is what will happen when the full array of subsidies end? In essence, as the second chart illustrates, the recent huge build-up in household savings means that Canadians have the where with all to substantially boost their spending both on personal services as well as on durable goods. But will they keep robust spending going after the federal money runs out? 

Because of Canada’s hefty transfer payments, Canada’s household saving rate recently peaked at 13.1 % of disposable income in the first quarter of 2021, down slightly from 12.7% cent in the fourth quarter of 2020. In other words, the savings rate in Canada was massively elevated because of the Covid pandemic, as the savings rate pre-pandemic was typically as low as 2%.  

In addressing the question of what happens to the economy when the support programs end, one must appreciate that it is not only the level of the savings rate that counts but the speed at which the savings rate will likely fall in the near term as the economy normalizes.

If the savings rate falls very quickly, the economy will have a faster economic boost from consumer spending (which normally accounts for about two-thirds of GDP), and of course, the financial markets will worry that the economy could become overheated and prone to higher inflation. 

In this writer’s opinion, the current temporary spike in the rate of inflation should not be the real concern going forward, since there is, and there will be, plenty of anti-inflation slack around in the Canadian economy next year.

Nonetheless, sharp increases or decreases in the personal saving rate do amplify swings in short-term economic growth rates and can be upsetting to financial markets.

Canada’s Household Saving Rate