By Brenda Bouw (CP) – 2 days ago
The recession is confusing a lot of consumers who on the one hand are told to save money for a rainy day but on the other are encouraged to spend to help boost the economy.
It's a conundrum economists call "the paradox of thrift," which means that too much savings can lead to an overall drop in consumption and threaten a nation's economic growth.
"Saving is good, but at the same time ... consumption is good," said CIBC World Markets economist Krishen Rangasamy.
Rangasamy said savings rates typically fall when the economy is strong and rise when it's weak. Consumption rates run in the opposite directions.
When times are good, Rangasamy said people feel comfortable with the rising price of their homes and stock portfolios and spend more.
"They think 'Why do I need to save when I am getting richer?"' he said.
On the flip side, when a recession hits, there's a change in mindset.
"That encourages people to save for the future," he said, which in turn weighs on consumption, which in turn contributes to a weaker economy and higher job losses.
Rangasamy said the key to a solid economy is a balance of both saving and spending.
"Zero per cent savings is not good and neither is 40 per cent," he said
Canadians' savings rate was 4.5 per cent in the April-June quarter, according to Statistics Canada. That is up from 3.4 per cent for same time last year and well above the 1.9 per cent savings rate in the second quarter of 2007.
The savings rate was 6.1 per cent in 2001, when the last economic downturn hit. That's the highest it has been since 1996.
Rangasamy expects the savings rate in Canada to reach six per cent again in the coming months, before falling again to around three per cent in 2011, when the economy is expected to make a more meaningful recovery and consumer confidence rebounds.
In the U.S., the savings rate was 4.2 per cent in July, which is up significantly from 0.8 per cent in April 2008.
Meantime, personal consumption in Canada rose 0.4 per cent in the second quarter compared to the first quarter this year. It was the first time consumption levels, tracked by volume, rose in Canada since the third quarter of 2008.
Rangasamy said personal consumption is on track for growth of 1.8 per cent on an annualized basis in 2009, and is expected to rise two per cent in 2010.
In the U.S., personal consumption fell 0.24 per cent in the second quarter and is on track for a one per cent drop on an annualized basis.
Rangasamy said consumption is key because it drives about 60 per cent of Canada's gross domestic product. That compares to about 70 per cent in the United States.
"Consumption is such a big contributor to GDP," he said. "Whenever consumption grows, GDP grows."
GDP measures the value of goods and services produced in a country. A recession is defined as two or more consecutive quarters of falling GDP.
BMO Capital Markets economist Douglas Porter said there is no "magic number" when it comes to how much Canadians should save and spend.
From an individual perspective, it depends on what stage of life you are in, Porter said.
"A person who is retired doesn't need to save... while someone who is just starting out has a tough time because they have so many big expenditures," Porter said.
Someone in the prime of their career, who is about 10 to 15 years away from retirement, should be in "maximum saving mode," Porter said.
Demographics also play a role, Porter said. He said the national savings rate could grow as more Baby Boomers save more leading up to retirement.
Porter also noted that the savings statistics may be understated, since not all sources of income are always reported.
Laurie Campbell, executive director of Credit Canada, a non-profit credit counselling organization, said encouraging people to spend the country out of a recession is a mistake.
"That's what got us into this mess in the first place," said Campbell.
Campbell said there is nothing wrong with spending money, but only if you can afford the purchase and you planned and researched it ahead of time.
"When unplanned purchases become impulsive, that is when it's not okay to spend," she said.
Those unplanned purchases too often lead consumers to rack up debt, Campbell said. Then, when a problem arises such as a job loss or financial emergency, the debt grows and can become unmanageable.
"People too often rely on credit to bridge the gap between these bad times," she said.
Credit card delinquencies rose to 1.28 per cent in Canada as of April 30, compared to 0.92 per cent at the same time last year, according to statistics on the Canadian Bankers Association website. The delinquency rate refers to balances not paid for 90 days or more.
As well, the loan amount credit card issuers have written off has risen to 4.72 per cent as of April 30, compared to 3.24 per cent at the same time last year.
The number of mortgages in arrears has also risen in Canada to 0.42 per cent as of June, or 16,436, according to Canadian Bankers Association statistics. That compares to 0.27 per cent or 10,319 for the same month last year.
And the Office of the Superintendent of Bankruptcy said there were 34.6 per cent more insolvencies in July than a year earlier. Business bankruptcies actually dropped slightly, but personal bankruptcies were up 37.2 per cent. There were 13,091 personal bankruptcies in July, while 526 businesses went under.
Earlier this year, the Certified General Accountants Association of Canada (CGA) released a report showing Canadians are getting deeper into debt and increasingly using credit to cover day-to-day living expenses. They called it "a highly disturbing matter" that has pushed national household debt to $1.3 trillion.
The CGA said debt levels - mainly mortgage and consumer borrowing in a period of low interest rates - increased 6.8 per cent at the end of 2008.
The report, which includes a survey done last November, says 42 per cent of Canadians said their debt load was rising as of late last year, which is up from 35 per cent a year earlier.
Last month, an ING Direct survey showed Canadians are socking away more money and spending less than people of many other industrialized nations in the current global economic downturn.
The report showed 77 per cent of Canadians have saved at the same pace or more in the past six months, which is just one percentage point behind the first-place Austrians.
Overall, Canadians were better savers that people in the United States, which came in third with 72 per cent of those surveyed saying they saved the same or more in the past six months.
However, more Americans had increased their savings than Canadians in recent months.
The survey found 60 per cent of Canadians said they were saving the same amount they did six months ago, while 17 per cent increased their savings. That compares to 47 per cent of Americans who were said they were saving the same sums, and 25 per cent having added more to their piggy banks.
In the ING survey, 23 per cent of Canadians said their savings dropped in the past six months, compared to a 28 per cent drop in the U. S.
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