(Montreal) The financial outlook for Canadian households is darkening as inflation eats away at real wages and rising interest rates slow economic growth, according to a new study by Desjardins.
Posted at 3:52pm
The coming months could be bumpy for household budgets as cracks appear in the pandemic recovery, the study released on Wednesday found.
The value of many assets will be at risk while liabilities remain, which will reduce households’ net worth, which could hurt their net worth development, the document adds.
“By the end of this extraordinary economic and financial cycle, the enormous wealth of Canadian households is likely to have shrunk, at least in real terms,” the study says.
Despite everything, the extent of this cut remains uncertain and “will depend largely on the success with which the Bank of Canada ensures a soft landing for the economy,” Desjardins said.
Meanwhile, the phasing out of government aid programs could weigh on some households’ budgets, while the savings rate is expected to gradually decline as costs rise, the document said.
According to Desjardins, Canadians with lower incomes and higher liabilities will suffer from this situation before others. High levels of debt and rising interest rates are likely to lead to more consumer bankruptcies.
However, the study suggests that Canadians can continue to expect job growth and income growth should remain robust.
“Fortunately, even as inflation eases, sales growth should remain healthy,” the study said.
Higher wages and a return to more normal levels of inflation will help reduce consumer defaults and bankruptcies, the research says.
Consumer spending and consumption growth are likely to slow in the coming months after a strong start to 2022.
The slowdown is due to both a stabilization in service spending after the economy reopens and the impact of price increases on goods consumption.
In addition, the cost of servicing debt – which has fallen during the pandemic – is expected to rise gradually as interest rates rise, the study warns.