Desjardins predicts 'bleak' future for household wealth in Canada

From the extremely high levels recorded during the epidemic, growth in disposable income is anticipated to decline

Desjardins predicts 'bleak' future for household wealth in Canada

A new report from Desjardins observes that Canadian households are facing difficult times, making it challenging for them to increase their net wealth.

In the report, Senior Director of Canadian Economics Randall Bartlett described how during the COVID-19 pandemic, extremely low interest rates and generous government support programs helped boost incomes and asset prices.

Now, Canadians must pivot as many of those trends see a reversal.

“With the value of many assets at risk and liabilities increasing for Canadian households, the outlook for wealth looks bleak,” the report said.

Due to a solid labor market and increased wages, Desjardins anticipates that growth in disposable incomes will moderate from the extraordinarily high levels experienced during the pandemic but remain strong.

However, most of the asset growth in Canada has been in the form of rising stock and property values, both of which have been dropping as a result of increased interest rates. In the meantime, Canadians' savings are losing purchasing power due to inflation.

“While real estate is the most important asset held by a majority of Canadian households, the debt incurred to buy that asset is also their biggest liability,” the report said. “While the value of assets can fluctuate, debt tends to stick around. Inflation does help reduce the relative importance of debt, but because it leads to higher interest rates, there will be more pain ahead.”

Desjardins stated that it anticipates consumption, a key economic engine in Canada, to decelerate this year as increased debt servicing costs and growing living expenses consume a larger share of household wages.

Along with many other significant central banks, the Bank of Canada has been actively raising rates to fight inflation. However, the current context for those rate increases is worries about a future recession.

Before the end of 2023, Desjardins anticipates that the BoC will need to reverse some of those increases.

“As the Bank of Canada takes its foot off the brake as economic activity slows, asset values and wealth should stabilize at a level that is more typical of a balanced economy,” the report said. “The huge wealth amassed by Canadian households will most certainly have diminished, at least in real terms," by the end of this "unusual economic and financial cycle."