Poorer households hit harder by economic conditions: StatsCan

In a climate of high inflation and rising interest rates, wealth and income inequality are growing, according to new data from Statistics Canada.

The national statistical agency reported that the income gap — the difference between the share of income captured by the top 40% and the share of the bottom 40% — grew by 0.2 percentage points in the first quarter.

That widening income gap reflects, in part, the composition of household incomes, with high earners benefiting from rising investment earnings and self-employment income, whereas low-income households saw slower wage growth, decreasing self-employment income, and a growing reliance on government benefits.

“Inflationary pressures and increasing interest rates had a negative impact on disposable income for the lowest income earners,” StatsCan said, noting that rising debt costs (on credit cards and mortgages) accounted for 84.4% of the reduction in net investment income.

For top earning households, higher interest charges “were more than offset by gains in investment earnings, mainly from dividends and bank deposits, which grew at almost double the average pace,” it reported.

For the top 20% of households, net investment income was up by 13.2% in the first quarter, and self-employment income rose by 13.0%, it noted.

Higher inflation and interest rates also prompted a decline in net savings below their pre-pandemic levels for all but the highest income households, StatsCan said.

“Middle-income earners were affected most by inflationary pressures over the last year, as they spent an average of $1,306 more than they earned in income in the first quarter,” it said.

Alongside the growing income gap and declining savings, StatsCan reported that the gulf between rich and poor households widened at the fastest pace on record in the first quarter. The difference in net worth between the most and least wealthy increased by 1.1 percentage points in the quarter.

The record wealth-gap growth was driven by poor households being hit much harder than wealthy households by recent economic pressures. Poor households saw their net worth drop by 13.8% in the first quarter, whereas net worth for the wealthiest was down just 3.8%, StatsCan reported.

It said that declining net worth was driven almost entirely by the housing market, with the average value of real estate down 8.6% in the first quarter, as housing prices dropped and mortgage costs rose. For the poorest households, non-mortgage debt also increased by 4.6%. The wealthiest households reduced their mortgage debt in the quarter.

Looking ahead, StatsCan said, “Persistently high interest rates and inflation are likely to continue to strain households’ ability to make ends meet without going further into debt, especially vulnerable groups, such as those with the lowest income, the least wealth and those of younger age groups.”

The agency noted that debt-to-income ratios for both younger and core working-age groups reached record highs in the first quarter, and are well above pre-pandemic levels.

“Although households of younger workers increased their employment income, persistently high inflation and interest rates continued to restrain their ability to make ends meet, as these households tend to hold higher balances on credit cards and mortgages relative to older age groups,” it said.

Core working-age households “experienced unprecedented increases in their debt-to-income ratios in the first quarter,” StatsCan noted, with the ratio rising 16.6 points to 275.8% for households aged 35 to 44, and jumping 20.5 points to 260.6% for households aged 45 to 54.

StatsCan said that only senior households (aged 65 years and older) had a debt-to-income ratio that was lower in the first quarter of 2023 than at the start of the pandemic.