Savings stockpile proves resilient: RBC

So far, households have hung onto the war chest of excess savings that they built up during the pandemic — however, the stockpile of savings won’t save us from a recession, and is increasingly the purview of the rich, suggests new research from RBC Economics.

In a new report, RBC economists report that household savings — which reached $350 billion in the third quarter last year, after the pandemic unleashed unprecedented government supports and curtailed certain spending opportunities — has yet to be diminished in spite of elevated inflation and rising interest rates.

While bank deposits have declined, “instead of flowing to consumer spending, this money has shifted into term deposits,” the report said.

In fact, the increase in household spending since pandemic-driven lockdowns ended has been entirely funded out of incomes, it noted.

That said, as the cost of living continues to increase due to both inflation and higher interest rates, household finances will increasingly feel the pinch.

“This dynamic will take the heaviest toll on lower income households — those with the smallest savings backstops,” it said.

At the same time, higher-earning households are expected to continue saving, as they retrench in the face of declines in the value of their real estate and financial assets.

“Surging interest rates, a sharp pullback in housing prices, and lower financial market asset values have eaten into consumer confidence. And lower consumer confidence typically leads to more saving, not less,” the report said.

Indeed, the pandemic-fuelled strength in household savings isn’t going to stave off a recession, it said.

“We still expect a ‘moderate’ recession in the first half of 2023 as central bank interest rate hikes cool an overheating economy,” the report said.

And, if high-income households were to deploy their excess savings to drive stronger spending, this could boost inflation, leading to even higher interest rates, “and potentially to a larger recession down the road,” it cautioned.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.