Savings rate will bounce back, economist predicts

Canada will revert to being a nation of savers again, as the economy eventually cools off, according to Scotia Economics.

In 2005, the collective savings rate of Canadians dipped into negative territory, an average of -0.4% of personal income. Compare to that to 10 years ago, when personal savings averaged +9.2% of personal income.

There are good reasons why Canadians have chosen to spend more and save less, says Scotia Capital economist Aron Gampel in a report released on Thursday. Canada has become a veritable “jobs juggernaut,” he says adding 1.7 million net new jobs since 2000.

The housing boom has also played a part, with Canadians opting to take advantage of continuing low interest rates and take on mortgage debt.

“And don’t forget that a cash-flush Ottawa, as well as many of its provincial counterparts, are ramping up expenditures on the nation’s neglected physical infrastructure, as well as providing additional tax relief,” Gampel adds.

Canadians are betting that the good times will continue to roll, Gampel says, and that may be a safe wager, at least in the short-term.

But banking on continued strong economic growth is a high-risk strategy, Gampel notes, especially if U.S. consumer fatigue sets in. “While Americans appear genetically bred to shop, they are gradually being weaned off the financial steroids that pumped up their purchases,” he says, noting that ultra-low interest rates and multiple rounds of tax cuts are a thing of the past south of the border. “Importantly, the cresting in home price inflation should reduce the equity cashouts that have helped fuel the recent spending boom.”

Other risks include simmering geopolitical tensions, most notably in Iran, and the possibility of a broader outbreak of avian flu.

And if heightened economic and political risks don’t get Canadians saving more, advisors might consider playing the demographic card. Nearly 28% of Canada’s population is in the baby boomer category — prime earning years, but also not that far from retirement.

“While this aging process is more of a gradual flow than a seismic shift, the immutable forces of nature suggest that Canadians ought to begin saving more and spending less.”

Gampel recommends that Canadians have a diversified financial plan to help insulate household finances from potential volatility in various markets.

Take a close look at outstanding levels of mortgage and personal debt, keeping in mind the impact of an unexpected upward bump in borrowing costs or downward swing in growth, he advises. “A pragmatic response would be to save more.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com