What emerges is a picture of a household sector saving much more during the pandemic than corporations, writes Philip Cross in the Financial Post. Below is an excerpt from the article, which can be read in full here.
Philip Cross, January 8, 2021
A recent report argued that households and businesses in Canada are sitting on $170 billion of excess cash — almost evenly divided between households ($90 billion) and businesses ($80 billion). It defined excess cash loosely as deposits in banks in excess of their recent trend. It’s clear that both households and businesses, faced with unprecedented uncertainty after the shutdown of large parts of the non-essential economy that threw millions of Canadians out of work, have chosen to hold cash above all other assets. But cash holdings are not a good proxy for total savings. What’s more, it is misleading to lump together all businesses, when the condition of financial and non-financial corporations has diverged sharply during the pandemic.
Fortunately, Statistics Canada publishes detailed data on household and business saving and lending. These data tell quite a different story than bank deposits alone do. What emerges instead is a picture of a household sector saving much more during the pandemic than corporations. Both net savings and net lending by households showed huge increases during the second quarter and remained at historically high levels in the third quarter. By comparison, savings by the corporate sector were minuscule in 2020, while net lending showed only a small increase compared with households. In fact, financial firms were the only part of the corporate sector able to generate net savings and they accounted for most of the net lending by businesses last year.
Household savings soared from 2.0 per cent of disposable income before the arrival of the virus to 27.5 per cent in the second quarter and 14.6 per cent in the third. Despite a sharp drop in earned incomes as jobs disappeared and hours worked plummeted, household disposable income rose by 12 per cent in the second quarter and remained high in the third quarter — due entirely to a massive increase in transfers from governments. As a result, household savings jumped from $77 billion (at annual rates) in the first quarter to $402 billion in the second and $207 billion in the third. Even after deducting outlays for housing, households swung suddenly from many years of net borrowing to a position of net lending of $306 billion in the second quarter and $70 billion in the third quarter.