Excess household savings may help economy avoid harsher downturn: BMO

High household savings in Canada and the U.S. may help both countries avoid a severe downturn as high interest rates ripple through the economy.

Although pandemic savings have diminished significantly, many households still have above-average savings, says the report published Friday.

Large savings were amassed by households during the pandemic as lockdowns restricted spending in areas such as entertainment and transit.

Many workers also benefited from income support programs rolled out by governments, which cushioned incomes.

Middle and upper-income households hold most of the excess savings currently in the economy, noted Sal Guatieri, BMO senior economist and the report’s author.

Meanwhile, low-income households have depleted most of their savings as high inflation and interest rates take a larger bite out of their budgets.

“That’s not surprising, given, number 1, they built up relatively lower savings to begin with than upper income households,” Guatieri said. “They’ve (also) been more challenged with the rising cost of necessities,

For the bottom 40% of income earners, net savings have dwindled by 12% between the first quarter of 2020 and third quarter of 2022. In contrast, savings were up for the top 40 per cent.

Although these excess savings among some households may serve as an economic buffer, Guatieri warns they could also serve as a “double-edged sword” for central banks fighting off high inflation.

The Bank of Canada and U.S. Federal Reserve have raised interest rates aggressively to slow spending in both economies and bring inflation down from decades-high levels.

The report also notes “the thinner cash cushion available for lower-income groups means they are more susceptible to a slowing economy.”

Nojoud Al Mallees, The Canadian Press

Nojoud Al Mallees is a reporter with The Canadian Press, a national news agency headquartered in Toronto and founded in 1917.