National Post (Latest Edition)
U. S. households wealthier than those
COVID-19 has infected and killed a higher proportion of the population in the United States than in Canada, but that hasn’t stopped household wealth from rebounding to a record level south of the border, outpacing wealth gains in Canada in the process.
According to U. S. data, a booming stock market and a series of fiscal and monetary stimulus efforts pushed the wealth of American households to the highest level ever in the second quarter of this year, in spite of a huge drop in the previous quarter when the novel coronavirus sent global asset values plunging.
For the second quarter of 2020, U. S. household wealth grew at a 6.8 per cent rate. Household wealth in Canada, meanwhile, rose by a less sparkling 4.9 per cent, according to data from National Bank Senior Economist Marc Pinsonneault in Montreal.
The reason for the apparent paradox, experts suggest, has more to do with economics than the epidemic itself.
Part of the explanation is the drag of Canadian consumer debt, which began the quarter at 164 per cent of household income, about 30 per cent higher than the comparable debt level in the U.S., he said.
In the second quarter, the ratio in Canada decreased to 146.4 per cent.
Canadians, typically conservative, spent less during lockdown, choosing instead to pay down their debts, said Peter Miron, senior vice-president of Environics Analytics Group in Toronto.
“People in Canada were paying off their plastic for lack of opportunity to buy things,” Miron noted, adding that many were also building their savings as a precautionary measure.
That’s part of the reason why Canada’s recovery from the bottom of the virus-driven recession has been less dramatic than that in the U.S.
While U. S GDP is expected to produce an overall decline of 4.0 per cent this year, comparable Canadian data shows a 5.6 per cent expected GDP contraction, TD Economics found in a Sept. 18 analysis. That is reflected in the difference in unemployment rates forecast by TD’S economics unit: 8.5 per cent in the U.S. vs. 9.7 per cent for Canada.
Benjamin Tal, deputy chief economist for CIBC in Toronto, notes that government support programs in both Canada and the U. S. provided more income to households than was lost in the epidemic and market meltdown.
“Household income in the U. S. and Canada went up because of government support programs,” he said. Some of that income went into mortgage down payments, fuelling more household debt, especially in top markets like Toronto and Vancouver.
Another factor was differences in how U. S. and Canadian households invest their savings.
In the U. S., which is home to the FANG stocks — Facebook, Amazon, Netflix and Google — the S&P 500 index of large- cap companies rose by 20 per cent in the period from March 31 to June 30. In the same period, Canada’s S& P/ TSX index rose by a more modest 16 per cent as energy stocks slumped in the tailwinds of falling global energy prices and chartered bank earnings were dragged down by lower spreads and provisions for non- performing loans.
After watching their wealth shrink in the spring meltdown, Canadians decided to cuts risks by paying off their debts. American investors returned to capital markets to try their luck, especially in soaring tech and pharmaceutical stocks. And that, in turn, translated to a higher growth of household wealth in the U.S. than in Canada.
“Debt reduction actually worked well in Canada given that for most families, most wealth is in their houses and condos, so when they paid down their debt, their ownership ratio to debt increased,” said David Macdonald, an economist with the Canadian Centre for Policy Alternatives in Ottawa.
“For people with money to spare, debt pay down vs. market investment is a choice,” he said. “But to own a house and maintain mortgage payments, you have to be middle class or wealthier. Those are the people who had the choice. It’s the group that was able to pay down debts.”