“We are becoming our grandparents; we're starting to think in terms of savings,” CIBC World Markets economist Benjamin Tal said. “I think this is going to be a profound change in the way we are viewing the economy and spending.”
There may be a darker side to the steep decline in net worth. Economists fear it could mean the current recession will be longer and deeper than others in recent decades.
OTTAWA — Canadians are retrenching as their net worth erodes rapidly amid the current market turmoil, boosting their savings and growing increasingly conservative with their finances.
Household net worth fell 4.4 per cent in the fourth quarter last year, marking the largest quarterly drop since Statistics Canada began collecting such data in 1990, the agency said Monday. Net worth is a measure of household assets including property and investments versus liabilities such as credit card debt and mortgages.
Canadians have now seen their net worth drop by $14,000 over two consecutive quarters from $179,300 per capita at the end of June to $165,300 by Dec. 31.
Economists say declining wealth is prompting more Canadians to save money, marking a profound shift in the psyche of a generation that has never seen a such major market correction.
S&P/TSX Composite
“We are becoming our grandparents; we're starting to think in terms of savings,” CIBC World Markets economist Benjamin Tal said. “I think this is going to be a profound change in the way we are viewing the economy and spending.”
There may be a darker side to the steep decline in net worth. Economists fear it could mean the current recession will be longer and deeper than others in recent decades.
The concern is that consumers will hamper growth as they cut spending because of worries about their declining property or investment portfolio values, a phenomenon known as the wealth effect.
From what he calls his position “on the front lines” of the market turmoil, Kurt Rosentreter, a certified financial planner at Manulife Securities, says he is seeing nervous clients take an extremely conservative approach to managing their money because of the declines they've faced in their investment portfolios.
Many are opting to sit on the sidelines and conserve their cash even if the “textbook” approach in a downturn is to buy securities at bargain prices, he said. Most of his clients come to him asking for low-risk savings vehicles.
“When you follow the news and see what your friends are doing and when it becomes the talk of the day at the water cooler, you get scared,” he said.
“The emotional side [overtakes] the textbook analysis, and you say, ‘Right about now, I sleep better at night knowing I bought a GIC or a term deposit or a bond mutual fund.”
Douglas Porter, deputy chief economist at BMO Nesbitt Burns, said consumer spending numbers already show Canadians were scaling back their consumption by the fourth quarter of last year, and it is now clear they were reacting quickly to their wealth decline, especially since jobless levels only began to rise sharply in early 2009.
“Clearly, consumers were responding quite quickly to something beyond just what was facing them in terms of their jobs or their mortgage payments,” he said. “They were clearly responding to the hit to their wealth as quickly as the fourth quarter.”
Mr. Porter argues the current downturn could exceed other recent recessions because of the heavier hit to household wealth this time around.
“This downturn will easily rival what we saw in the early 1990s and even potentially the early 1980s because the consumer is taking such a heavy one-two punch from the big losses in employment and an extraordinarily large drop in household wealth,” he said.
The Bank of Canada has also recently begun to signal it is watching the impact of the wealth effect on the economy.
In a March 3 release, the central bank noted that delays in stabilizing the global financial system “along with larger-than-anticipated confidence and wealth effects on domestic demand” now point to a “sharper decline” in Canadian economic activity than initially forecast.
Economists also believe household wealth is likely to decline even further in the first quarter of this year as investors face further stock market declines as well as an accelerating drop in house values.
New data Monday from the Canadian Real Estate Association showed that while the number of existing home sales improved slightly in February, average prices were down 9.2 per cent from the same month last year, with a majority of major markets reporting price declines in the month.
While Canadians' wealth is declining, however, the numbers are dwarfed by the cuts experienced in the United States, where households have faced six consecutive quarters of declines. In the past two quarters of 2008, Americans saw their household net worth drop by $66,000 compared with $14,000 in Canada.
Mr. Tal, meanwhile, said he remains deeply concerned about the increasing debt levels of Canadian consumers, which rose further still in the final quarter of last year.
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