Vancouverites least prepared with rainy day fiscal fund
Cash has been king in the business world since the financial crisis. Analysts and economists the world over effectively evoke Carl Sagan in noting the billions and billions of dollars in cash sitting in corporate bank accounts instead of being used to expand and stimulate overall employment.
But the levels of cash held by Canadian households have been declining, which poses some worrying risks to the financial health of the country’s consumers.
An RBC Economics report noted that Canadians’ holdings of cash and deposits have fallen nearly 29% over the past three decades and have dipped below the long-term average since the late ’90s. Today, less than 15% of household assets are held in cash. This can be worrisome for a growing number of households that face “adverse economic shocks” like having a key household breadwinner lose his or her job.
This is a significant issue for households in B.C., and particularly in the Lower Mainland, which TD Economics has suggested are the most vulnerable to adverse personal circumstances. Its benchmark report in 2011 noted that B.C. residents had the country’s highest debt-service ratio and are the most vulnerable to interest rate increases.
Meanwhile, another TD report noted that 41% of British Columbians don’t have any money set aside for unexpected expenses, even though nearly two-thirds said they needed cash to deal with unexpected budget challenges such as being laid off, paying a bill for a sudden medical issue or for urgent home repairs.
For the most part, Canadians have managed to keep their heads above water with their debt because of record low interest rates, and RBC noted that most Canadians could manage a 1% increase in interest rates given the Bank of Canada overnight rate has remained at historical lows for a record period of time because of the sluggish economy.
But the trade-off with low interest rates is that Canadians are putting more of their financial assets in more risky and volatile investments like stocks and insurance products and mutual funds that have a majority of assets in equities. This poses substantial risks in the longer term for Canadian households.
More on this next week.