The economy is in a funk – and, increasingly, so are we.
With inflation eroding our paycheques and “technical recession” talk in the air, consumers have cut back on discretionary spending such as restaurant meals and travel in recent months, according to RBC Economics.
The good news is that Canadians are still sitting on some pandemic savings. The bad news is that some of us – myself included – are more tempted than ever to blow what’s left in our bank accounts.
After losing years of our lives to the COVID-19 pandemic, many people have (understandably) come to the conclusion that you only live once. We all have our hankerings. Perhaps you’re craving an expensive watch, a luxury motorcycle, a designer purse or a night on the town.
Me? I desperately want another tropical beach vacation. I contracted chikungunya on my last one (darn mosquitoes), so I deserve a do-over, right? Or so I like to delude myself.
It’s far too easy to rationalize unnecessary spending in moments of weakness, so let’s make a collective pact to keep ourselves honest about the health of our personal finances. Unless we can truly afford such indulgences, we must resist the urge to splurge.
Logically, we know that preserving what’s left of our savings should be the priority as the economy cools.
Canadians amassed record savings during the pandemic because of government support payments and economic shutdowns. The high watermark was roughly $350-billion in the third-quarter of 2022, according to the number crunchers at RBC.
Naturally, we’ve spent some of that money since then.
Canada’s household savings rate, which is the difference between disposable income and spending, stood at 5.1 per cent, or $80.21-billion, in the second-quarter of 2023, according to the latest data available from Statistics Canada.
That compares with a household savings rate of 2.8 per cent, or $36.88-billion, during the fourth-quarter of 2019, the period prior to the first pandemic closures.
Of course, it’s been easiest for higher-income earners to preserve a savings cushion during these inflationary times. But Canada’s elevated household savings rate suggests that consumers still have some buffer as the economy sputters.
The opposite is true in the United States, where consumers have largely depleted their pandemic savings, according to a recent report by the Federal Reserve Bank of New York.
In fact, the United States is the only high-income economy that has seen its household savings rate fall below its prepandemic average, the study says.
“This divergence is quite stark,” states the report. “The average U.S. saving rate since 2022 is down some 2.5 percentage points from the 2015-19 average. Saving rates elsewhere range from slightly above prepandemic norms (0.5 percentage point higher in the euro area) to markedly above (3.5 percentage points higher in Canada).”
Although the New York Fed gave Canadians a nod for holding on to a bigger share of their pandemic savings, its analysis shows that European consumers have done the best job of preserving wealth since 2022.
Now is not the time for Canadians to adopt the spendthrift ways of our American cousins. As the Bank of Canada has tried to explain in its economic parlance, excessive consumption will only make inflation worse.
Consumers may be yearning for an escape from the economic doom and gloom. But perhaps what we really need is an attitude adjustment. After all, didn’t COVID-19 just remind us of the importance of having emergency savings?
“We need to have that cushion to save us from another lockdown, to save us from companies that are starting to lay off so many people right now,” said Elizabeth Naumovski, vice-president of marketing at Caldwell Securities Ltd. and host of Empowered on The News Forum television station.
“As households, we need to protect ourselves just like corporations do,” she added.
This is especially true for women, who were disproportionately affected by the initial pandemic-related layoffs and who still earned 9.2 per cent less than their male counterparts in 2022, according to Statscan. (The gender pay gap is even bigger for Indigenous and immigrant women.)
Here’s another reality check: Women’s lifetime earnings are also suppressed by maternity leaves and caregiving responsibilities even though we live longer than men. That means women need to be strategic about saving for the future, Ms. Naumovski said.
“If you can’t afford it, don’t buy it. But with ‘buy now, pay later’ and credit cards, people just think, ‘Okay, well, I’ll just amortize it.’ ”
Her advice is sound. If you’re going to purchase something, calculate how many hours you have to work to pay for it. Glean savings by trimming your expenses, including those long-forgotten subscription services that are charged to your credit card each month. Save $5 a day, and it adds up to $1,825 a year.
“That’s the money that you can use and put toward your emergency fund,” she added. “Nobody else is going to give you that money and bail you out.”
We all want to live a little. But don’t deplete your savings stockpile to do it. Retail therapy isn’t the antidote to our economic blues.