With the S&P 500 hitting new lows for 2022 and the Dow Jones Industrial Average falling into a bear market, pessimistic investors are hoarding cash. In fact, Canadians built up a record amount of savings during the pandemic. According to national economic data, accumulated savings from the first quarter of 2020 to the second quarter of 2021 was around $300 billion (13% of GDP).

Why Did Canadians Save So Much During the Pandemic?

Before the pandemic, the savings rate—Canada’s total savings as a percentage of disposable income—had been declining for years. The pandemic reversed that trajectory thanks to financial assistance from the federal government and a substantial drop in consumer spending.

It’s worth noting that Canadians lost an average of $1,600 in labour income in 2020. But the loss of disposable household income was more than offset by government support programs. In aggregate, the direct fiscal stimulus provided by the government amounted to about $3,400 per Canadian aged 15 or older. In addition, due to COVID-19 fears and lockdown measures, Canadians also spent around $4,000 less in 2020.

As a result, household net savings totalled around $13,105 per household in 2020 and $9,972 in 2021. That’s a little over $300 billion.

How Much of the $300 Billion Remains?

To say Canadians are sitting on a $300 billion windfall waiting to juice the economy, would be a little misleading. There’s a big difference between excess savings (savings that are above and beyond what consumers would have typically saved before the pandemic) and available cash.

The amount of available cash is much smaller than excess savings. Statistics Canada calculates savings before large assets like homes, renovations, and mutual funds, all areas that Canadians spent on over the last two years.

How much of that $300 billion is left after that? Analysts at CIBC Capital Markets estimate that there is around $90 billion in excess deposits. That might sound like a lot, but it covers just one and a half months’ worth of retail spending in Canada.

And, because of high inflation and rising interest rates, more and more of that will go to paying down debt. Despite the influx of cash and growing savings, household debt ballooned during the pandemic. While Canadians paid down some debt, mortgage debt on real estate more than doubled in 2021 from 2019.

Are Household Debt Levels Climbing?

According to Statistics Canada, household debt is climbing again. In the second quarter of 2022, household debt as a proportion of income hit a record 181.7%, up from 179.7% in the first quarter. That means Canadian households have $1.82 in debt for every dollar of disposable income.

Higher household debt ratios are a negative economic indicator since that debt is borrowed on future income and economic activity. Household debt is mostly mortgage debt but it also includes items like credit card debt. Keep in mind, 181.7% is just an average; only one third of Canadian households have a mortgage.

The problem with a high household debt ratio is that it reduces a household’s ability to respond to economic shocks. Having an emergency fund or home equity line of credit (HELOC) can help mitigate risks but tapping into it to buy a hot tub and then having to pay it back when you need emergency funds can compound risks.

How Does Inflation Erode Savings?

Runaway inflation is also having a huge impact on savings. In an effort to avoid an economic meltdown during the 2020 pandemic, the Bank of Canada, U.S. Federal Reserve, and other central banks, cut their key overnight lending rates to historic lows. Low interest rates make it easier for businesses and individuals to borrow, which in theory, helps support economic growth.

Since Canadians and Americans took out or renewed mortgages or loans at near-zero interest rates, the cost of serving that debt during the pandemic was manageable. But with interest rates rising fast, a larger share of disposable income is being used to cover that interest.

To service that growing debt, roughly 7.3 million Canadians over the age of 18 have taken out loans or used their credit cards to keep up with inflation. And more than half (53%) of Canadians say they can’t keep up with rising inflation, especially with the price of food, gasoline, and energy.

Moreover, when asked in February 2022, half (51%) of Canadians said they wouldn’t be able to cover an unexpected $1,000 expense. Because of inflation, approximately 15% say they wouldn’t be able to pay for an unexpected bill regardless of the amount.

How Has Inflation Affected Spending in the U.S.?

The same kind of dynamics are happening in the U.S. During the pandemic Americans socked away an estimated $2.5 trillion in extra savings. But that nest egg is dwindling fast as Americans used their cash to combat the worst inflationary environment in over 40 years.

According to one report, two-thirds (67%) of Americans say they are using the money saved up during the pandemic to meet their daily needs.

In addition to rising inflation, wages are not keeping pace. From May 2021 to May 2022, real wages adjusted for inflation fell 3.0%, widening the gap between earnings and the cost of living. To deal with rising costs:

• 8% of Americans have completely emptied their savings.
• 23% have depleted a substantial amount they’d saved
• 36% have spent a small amount from their savings

Not surprisingly, consumer debt is rising in the U.S. and savings are falling. Between the fourth quarter of 2021 and the first quarter of 2022, U.S. consumer debt rose by $266 billion. And that number continues to rise as more and more Americans tap their savings to make ends meet.

Through the week ending on September 21, cash had inflows of $30.3 billion while global equity funds saw outflows of $7.8 billion. Bond funds, meanwhile, lost $6.9 billion and gold lost $400 million.

With inflation still at 40-year highs and interest rates on the rise, more analysts are suggesting the U.S. and Canada are heading for a recession. Cash and commodities are expected to continue to outperform bonds and stocks, meaning savings will become a lot more important.

Canadians and Americans Are Seeing Their Savings Deplete

With inflation topping eight percent, anyone with money is seeing their savings evaporate. It’s a different story than 1981 when inflation topped more than 12% and banks were paying out more than 19% in interest. Even in the early 1990s, when inflation was at 5%, banks were paying more than 9% in interest.

The reason? Banks don’t need to pay more interest on accounts unless they have to. And there’s not a lot of incentive to do that right now; lower interest means more profits for banks.

All Canadians hope to retire in comfort, but few are taking the steps necessary to save enough to make it viable. Some don’t have enough money saved, others are seeing their savings depleted by rising inflation, and some don’t make enough to save a significant amount of money. Even some high earners are not prepared for retirement.

When it comes to creating a path to saving, it’s important to have a clear goal and know how much you need to save. It’s also wise to begin saving as early as possible. One way to maximize your monthly income and achieve your retirement goals is by investing in a high-interest savings exchange-traded fund (ETF) and fixed income ETFs.

About Evolve ETFs

With over $3 billion in assets under management, Evolve is one of Canada’s fastest growing ETF providers since launching its first ETF in September 2017. Evolve is a leader in thematic ETFs and specializes in bringing disruptive innovation ETFs to Canadian investors. Evolve’s suite of ETFs provide investors with access to: (i) long term investment themes; (ii) index-based income strategies; and (iii) some of the world’s leading investment managers. Established by a team of industry veterans with a proven track record of success, Evolve creates investment products that make a difference.  For more information, please visit www.evolveetfs.com.

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