Families ill-prepared for recession

By Steven Lamb | January 22, 2009 | Last updated on January 22, 2009
3 min read

By now there is little debate about whether or not Canada is in a recession. How bad this economic downturn will be is anyone’s guess, but it’s not uncommon to hear it described as the worst since the Great Depression.

Whether it is as bad as that, or only as bad as the 1990s, it will take years for most households to recover from the effects, according to the Vanier Institute of the Family. But many Canadians seem to be in denial.

A survey released last week by BMO Financial Group found that nearly 70% of respondents said they did not have a financial plan in place, and 80% said they did not think economic uncertainty was enough incentive to get one. More than 40% do not have emergency funds stashed away.

“However, our research also indicates that some Canadians are unfazed by the shaky economy — in fact they may be in denial,” said Linda Knight, president and chief operating officer of BMO Mutual Funds. “Having a plan in place to help make sense of it all is paramount.”

Most analysts seem to agree that the current recession will be worse than the one that began in 1990, which saw the destruction of 355,000 jobs over two years. It wasn’t until 1995 that employment reached 1990’s level, according to the Vanier Institute’s The Current State of Canadian Family Finances 2008 Report.

The unemployment rate leapt from 7.2% in 1990 to a peak of 12.3% in 1994, and did not fall back to 7.2% until 1999. During the recession before that, 360,000 jobs were lost in 1982 alone, driving unemployment to 14% in 1983.

“The job outlook for 2009 does not look promising. Based on the experience during the last two recessions, employment could easily drop by 350,000,” the report says. “It could be less than 350,000, but the odds are that the job losses will be even larger. Many international organizations have characterized the current slowdown as the worst since the 1930s.”

To make matters worse, Canadians are heading into this recession with far more debt than they had at the beginning of the last two recessions. In 1990, the personal savings rate was 13%, the report says. Today, the savings rate stands at just 3%.

Most families rely on two incomes, so if one person loses his or her job, it will prove nearly impossible to make ends meet, much less service debt. Over 600,000 Canadian households now have a debt service ratio of over 40%.

“While average household income is 12% higher than it was in 1990, spending is up by 24%, and total family debt is up 71%, growing six times faster than incomes,” says Clarence Lochhead, executive director of the Vanier Institute. “Families have been living a lot closer to the edge of the monthly budget, and in many cases far beyond it.”

The average household debt load is now $90,700, up 71% in real terms over 1990. Total debt is 140% of disposable household income, compared to 91% in 1990.

“The recession will likely push many more Canadians over the edge,” the Vanier Institute report says. “Canadian households have clearly entered the ‘danger zone’ and might be subject to more difficult household financial difficulties than most analysts suggest.”


Steven Lamb