Canada’s ‘uneven recovery’ is leaving the middle class behind

Article content

Canada in some ways is a tale of two economies.

On the surface, it looks like household finances have never been stronger, with savings at record levels, says Royal Bank of Canada economist Carrie Freestone in a recent report.

“But under the surface there are clear signs that the average Canadian consumer is suffering,” she said. “Delinquency rates are rising, demand for services like food banks is at record levels, and per-capita household spending is falling like the economy is in recession.”

Article content

The reason for this disparity is that the accumulation of household savings in Canada has not been evenly distributed, said Freestone.

The people piling up the savings are Canada’s highest earners, the top 20 per cent. This group is putting away about one third of their take-home pay each quarter, she said.

Since 2019, the top 40 per cent of earners accounted for 60 per cent of the appreciation in financial assets.

“This explains why household deposits have risen significantly while food banks struggle to meet demand,” said Freestone.

Inflation, higher interest rates and rising unemployment have all eroded the purchasing power of the lower income groups.

“Those in the bottom 20 per cent of income earners are going into debt to purchase essentials,” said the economist.

Lower income households got a reprieve during the pandemic from government aid, but now they are back to where they were in 2019, spending 105 per cent of their disposable income on essentials, she said.

And it’s not just lower earners who are being squeezed.

The economy coming out of the pandemic have also stretched the finances of the middle class.

Article content

Article content

In 2023, this group put the biggest share of their take-home pay to essentials since 1999, said Freestone. In 2024, they were spending 17 per cent more than their income or “dis-saving.”

“This group has completely depleted ‘excess’ pandemic savings, squeezed by higher mortgage payments and higher costs for essential goods,” she said.

Judging by the headlines recently, you might think things were improving. Inflation has returned to 2 per cent, wage growth has overtaken price growth and the Bank of Canada is lowering interest rates at a fair clip.

“But, this does not adequately capture how inflation ‘feels’ to Canadian households,” said Freestone.

In most cases, prices have not gone down; they are merely rising more slowly. Grocery prices are still up 25 per cent from before the pandemic, gas prices are up 33 per cent and a bigger share of Canadians’ spending is going to these essentials.

Higher income earners have also taken the lion’s share of wage increases. Over the past three years, the top 40 per cent of income earners accounted for 70 per cent of wage growth, said Freestone.

Article content

Average wage growth for the middle class is up just 3.7 per cent during that time, compared to 13 per cent for the highest earners.

This uneven recovery makes the Bank of Canada’s job “exceptionally difficult,” said Freestone.

While higher interest rates increase the cost of borrowing, cooling demand and eventually inflation, they also generate higher returns on investments and savings for Canada’s wealthy, widening the nation’s income gap.

 Sign up here to get Posthaste delivered straight to your inbox.

Talk about a miss.

America’s labour data Friday was a shocker when it revealed that instead of gaining 100,000 jobs as expected, the economy added just 12,000.

Turns out strikes and hurricanes made October a bad month for job seekers in the U.S., pushing down net growth by tens of thousands of jobs.

The unemployment rate stayed at 4.1 per cent, suggesting that the labour market is still fundamentally healthy, though maybe not robust.

Both the U.S. election and the Federal Reserve’s interest rate decision are on the agenda this week — and economists say, the Fed is likely to look through this poor showing and keep its cut to a quarter point.

Article content

As for the presidential contest, your guess is as good as mine.

• The Manitoba government releases a new critical mineral strategy.
• Today’s Data: United States factory and durable goods orders
• Earnings: Brookfield Asset Management Ltd, Sun Life Financial Inc., Toromont Industries Ltd., Cargojet Inc, Loews Corp.

What’s the most tax efficient way to allocate assets over a variety of accounts? A reader and his wife have two tax-free savings accounts (TFSAs), two registered retirement savings plans (RRSPs) and one joint non-registered investment account between them. Our financial expert helps them find the best strategy. Find out more

Hard earned truths

In an ongoing series about what the next generation needs to know to build wealth, we offer hard earned truth #4: Passive investing has changed the game. If you don’t take advantage, it could mean less money in your pocket. Find out more

Article content

McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Financial Post on YouTube

Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here

Article content