Report paints bleak picture of Canadians’ ability to weather economic storm

Recovering from the economic impacts of the Covid-19 outbreak at least partly depends on the resilience of household finances, says a new paper from the Bank for International Settlements (BIS). For Canada, that picture isn’t encouraging.

The paper argues that the financial resilience of households is important for both macroeconomic and financial stability.

“Consumption typically accounts for about 60% of GDP and banks’ claims on the household sector (mostly in the form of mortgages) represent 20–40% of their asset portfolio,” the paper said.

Against that backdrop, the pandemic-driven lockdowns “amount to a very large negative shock, forcing households around the world to grapple with reduced hours, furloughs and outright unemployment.”

“The depth of the recession, its duration and the pace of recovery hinge on how well households can weather this shock,” the paper said.

A significant share of households in countries with high debt loads, such as Canada, aren’t in any position to endure a long period of income disruption, the BIS found.

“In Australia, Canada, Finland, Germany, Italy, the United Kingdom and the United States, households in the bottom 20% of the wealth distribution could not cover more than three months of lost income by drawing down savings,” the paper noted.

In other words, these households couldn’t manage “subsistence consumption” — defined as staying above the poverty line (half the median income) — for even three months.

Conversely, in Japan, poor households could cover almost 20 months of lost income.

France and Korea are the only other countries where poor households could last over 12 months.

By contrast, the paper noted, households in the top 20% of the wealth distribution have savings that dwarf subsistence consumption levels.

In Canada, the top 20% should be able to last about 40 years on their savings. Whereas the top 20% in the U.S. have well over 100 years’ worth of savings.

These assessments of household resilience are impacted by debt repayment costs, the paper also found.

“The adequacy of household liquidity buffers drops once debt service costs are factored in together with consumption,” the paper noted.

“The decline in the adequacy of buffers is especially severe for households in the middle 20% of the net wealth distribution,” it said, adding that the resilience of these households is particularly important to financial stability, as they hold more mortgage debt than poor households.

Once debt service costs are factored in, “households in Canada, France and Spain lose almost a year of coverage and households in the United States and Australia drop to below one year of coverage,” the paper said.

Indeed, for Canada, the paper indicates that the middle 20% of households have almost three years of subsistence level savings on hand, but that this drops to under two years when their debt service obligations are included.