Canadian household finances were stretched coming into this year and will face a serious test from COVID-19, says a report by TD Economics.
Temporary income replacement and debt deferral programs will go a long way in helping households whose livelihood has been impacted by the pandemic, but economic disruptions brought about by the pandemic will leave a lasting mark on household finances and indicators of financial wellbeing, added the report.
“On the one hand, debt servicing costs are expected to decline precipitously. Household wealth has also taken a hit, but robust gains over the past decade should provide a financial lifeline during the downturn,” it said.
“On the other hand, the saving rate is expected to increase as households reduce spending and ramp up precautionary savings due to elevated economic uncertainty. While debt growth is likely to slow, the short-term shock to disposable income is likely to push up the debt-to-income ratio in the near-term. Together, a higher saving rate and leverage ratio suggests increased downside risk to the outlook for consumer spending.”
TD said it expects it will take until at least the second half of 2021 for the unemployment rate to return to its pre-crisis level, suggesting that the economic pain will linger for some time to come.
“Highly leveraged Canadian households are facing very uncertain and challenging times as a result of the COVID-19 pandemic. Realizing this, governments, financial institutions and the Bank of Canada have rolled out an unprecedented suite of measures aimed at supporting households and limiting the economic fallout,” said TD. “These measures should help avoid a protracted household deleveraging cycle and preserve the lion’s share of the wealth that households have amassed over the years.
“Lower interest rates and payment deferrals will also help to keep debt servicing costs more manageable, while a sizeable wealth cushion will offer an additional buffer to tap into to weather the storm. Once the dust settles, households will likely emerge out of this crisis with higher saving rate, but also higher leverage, increasing the downside risk to the longer-term consumer spending outlook.”
