Canada’s household finances may not be in as dire a shape as headline debt levels suggest and won’t slam the brakes on consumer spending next year, according to a new study by BMO Capital Markets.
Focusing purely on rising debt, which has reached a record level of about 145% of household income, misses the fact that family wealth has risen at the same time, the report said.
Rebounding stock markets and an improved savings rate have boosted household net worth to about six times disposable income, up from five times in the 1990s, it said.
Domestic demand was one of the few bright spots in Canada’s third-quarter growth figures, with gross domestic product coming in at just 1%, below economists’ forecasts and lagging the U.S.
Some economists said that domestic demand may wane on an uncertain jobs picture and as consumers focus on cutting debt.
BMO said the measured savings rate has been rising to average out at about 4% over the past four quarters, almost double its record low hit in 2005.
However, the measured rate doesn’t give the full picture, looking at how much households are saving from current income and ignoring unrealized capital gains and returns from tax-sheltered vehicles.
A better measure may be looking at the change in net financial assets as a share of disposable income. While the measure is a lot more volatile due to factors such as booms and busts in the stock market, smoothed out over a five year period it has come in at double the published savings rate, BMO said.
