Wealth, income gaps widening once again: StatsCan

After narrowing briefly during the pandemic, wealth and income gaps are widening once again amid the tougher economy and financial markets, according to new data from Statistics Canada.

In a pair of new reports, the national statistical agency indicated that groups at the lower end of the income and wealth distributions were hit harder in the second quarter as economic conditions shifted.

Overall, average household wealth declined by 6.5% in the second quarter, StatsCan said. “[H]ouseholds have recently faced a perfect storm of economic pressures, with asset values declining amidst turmoil in financial and housing markets, as well as increasing interest rates and persistently high inflation,” it said.

For the poorest 20% of households, average net worth declined by 12.0% in Q2, and fell by 8.2% for younger households (where the chief breadwinner is less than 45 years old).

“Reductions in wealth for the least wealthy were largely driven by higher-than-average increases in debt, while younger households were affected more by declining real estate values,” said StatsCan.

For the wealthiest households (top 20%), average net worth dropped by 5.9% in the second quarter, driven by a 6.0% decline in the value of their financial assets and a 5.4% drop in their real estate holdings. StatsCan noted that their debts remained relatively stable, rising just 0.4%.

With poorer households’ net worth falling more significantly, the household wealth gap — the difference between the top 20% and the bottom 40% — widened in the second quarter for first time since the start of the pandemic, StatsCan noted.

In the second quarter, the wealth gap grew by half a percentage point after narrowing by two percentage points since the first quarter of 2020.

Similarly, in a separate report, StatsCan said that the income gap — the difference in the share of disposable income for the top 40% and the bottom 40% — rose by 0.2 percentage points in the second quarter to 46.3%, its highest mark since the beginning of the pandemic.

The wider income gap came as the lowest-income households (bottom 20%) saw the expiry of pandemic benefits, which more than offset strong wage gains for these families.

Average disposable income for the bottom 20% dropped by 5.7% in the second quarter, even as income from wages and salaries rose by 11.3% amid tight labour markets.

Conversely, for the highest-income households, average disposable income rose 1.3% in the second quarter, driven by employment income and investment earnings.

For the top 20% of households, average disposable income was seven times greater than those in the bottom 20%, StatsCan reported.

Returning to wealth inequality, StatsCan also reported that younger households were the most affected demographic, as they saw their net worth decline at the highest rate as housing markets swooned.

“Younger households tend to be more susceptible to reductions in real estate values as they derive more of their net worth from that asset category, while older households have had more time over their life cycle to diversify their asset portfolio,” it said.

At the same time, declining financial asset values weighed more heavily on older households, StatsCan noted.

“The average value of financial assets declined by 6.5% for households aged 65 years and older, and between 5.7% and 6.3% for households under 65 years,” it said.

StatsCan also reported that household leverage (as measured by debt-to-asset ratios) increased in the second quarter, particularly for younger households.

However, it also noted that leverage generally remains lower than it was before the pandemic, and that debt-to-income ratios remained stable in the second quarter, as income growth largely kept up with rising debt levels.

Looking ahead however, StatsCan warned that “households may face further challenges in maintaining their economic well-being, especially those in vulnerable groups, such as the least wealthy and those in younger households” amid higher interest rates and elevated inflation.

Indeed, inflation has weighed on household savings, StatsCan reported.

The impact of the shift economy on savings in the second quarter was most pronounced in the middle 20% of households (by income) , as these households moved from away from a net saving position.

Savings held up best for households in the top 20%, which are least affected by higher prices, the agency said.

“Over time, the ability of vulnerable groups to maintain their average net saving — and, by extension, their economic well-being — will largely depend on their ability to secure higher wages in the face of labour shortages and on-going inflationary pressures,” the report concluded.