Canadian bank deposit data showing mountainous savings increases in the past five years create an “illusion of excess cash,” Desjardins Group economists say, with term deposits unlikely to end up invested in stocks even if interest rates fall further.
The dollar value of Canadian personal deposits has risen by $500 billion since 2019, but economists Royce Mendes and Tiago Figueiredo write that with more context, “this so-called excess cash isn’t all that excess.”
“Our analysis shows that even if interest rates fall materially from current levels, there’s limited scope for those funds to flow into other asset classes,” they wrote. “Our hypothesis is that much of the money currently in term deposits will either be used to pay down mortgages or to beef up demand deposit balances” — that is, standard savings or chequing accounts — “that have been on an unusual downward trend.”
Mendes and Figueiredo argue that the rise in savings needs to be understood in the context of households’ total portfolio of assets or “compared to other variables such as the size of the economy.” The latter context “accounts for changes in population, prices and more generally, the overall capacity of the economy to generate such savings.”
When they examine household deposits as a share of nominal gross domestic product (GDP), the economists find that “total personal deposits are simply tracking the uptrend seen over the past quarter-century.” Household deposits as a share of net worth or of total assets “similarly show that these holdings aren’t very different from pre-COVID norms,” Mendes and Figueiredo write.
The economists note a similar outcome when they examine household net worth. Households in Canada are “some $5 trillion wealthier than they were pre-pandemic,” they write, but when viewed as a share of nominal GDP, the data “are now undershooting the 20-year trend.”
These observations align with present-day consumer behaviour, in which spending is far from carefree or enthusiastic.
“If Canadians were feeling flush with cash or wealthy, households would probably be spending significantly more of their incomes,” the analysis noted. “Instead, the personal savings rate is higher than it’s been in three decades, aside from the pandemic. Employee compensation growth has easily outpaced consumption of goods and services, with households taking a cautious approach to new spending.”
Even if Canadians’ elevated savings rate persists, Mendes and Figueiredo don’t expect a boost in stock purchases. “New money saved is likely to head into bank accounts and safe fixed income products this year, given the economic uncertainty,” they wrote.
