All income quintiles have firepower to ignite economic expansion, argues analysts
While some pessimistic economists may think an imbalance of savings across households could hobble Canada’s progress toward a full-on economic recovery, analysts from National Bank argue that the Great White North has a strong base to take off from.
According to Matthieu Arseneau and Alexandra Ducharme, households have stored away some $277 billion in excess savings since the start of the pandemic. That sum, they said, is equivalent to 12% of GDP.
Some pundits, they said, are concerned that those savings have pooled more in the hands of the better-off, who have a lower marginal propensity to consume. The upshot, according to the thinking, is that a large chunk of the savings won’t translate into the consumption needed to fuel Canada’s economic resurgence.
“It is true that the savings are concentrated in higher-income households, but not in a completely disproportionate way,” Arseneau and Ducharme said.
Citing data from Statistics Canada, they noted how almost half (46%) of the excess savings was spread across the three lowest-income quartiles, including those with average household disposable incomes of $30,000, $58,000, and $80,000. Those segments of the economy, they suggested, have a higher MPC, meaning a larger share of the 46% is likely to go back to the economy.
Households with an average disposable income of $183,000 reportedly accounted for 29.8% of excess savings nationally, slightly more than those with average disposable incomes of $107,000 (24.6%).
“Moreover, it turns out that MPC is not nil for high-income earners,” the two added.
Referencing a study by the Federal Reserve of Boston, they said that in the U.S., the MPC drops from 97% for the lowest quintile to 48% for the highest.
Applying those MPC estimations to the current distribution of excess savings across Canada, they said, leads to a weighted average MPC of 62%.
If excess savings had been equally distributed among all income quintiles, they said the weighted average MPC would have been only slightly higher at 67%.
