It would be nice to believe economists who say this recession is fundamentally changing Canadians, making them spend less and save more.
After all, there’s been a recent decline in credit card use and a rise in the personal savings rate. In the fourth quarter of 2008, people were saving 4.7 per cent of their disposable income on average, the highest level since 1995. Profligate grasshoppers appear to be turning into thrifty ants.
Don’t believe it.
Once happy days are here again, Canadians are more than likely to resume their extravagant ways. The reckoning may be put off until a wave of baby boomers retires to the horror of lingering indebtedness and insufficient income.
Sure, credit card use is slipping right now, but it isn’t just because card holders have been scared into temporarily spending less. Credit card issuers, primarily the big banks, are restraining market growth because they fear that delinquencies will mean surging losses on their credit card portfolios.
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Losses on Canadian credit cards rose above three per cent of average balances during the third quarter of 2008 (the seventh straight quarterly rise) and it’s a fair assumption that things are worse now. Of late, banks have significantly increased the amount of money they set aside to cover potential card losses.
But once the recovery takes hold, banks and other issuers will aggressively market cards again because they’re so lucrative. CIBC, the country’s biggest issuer with outstanding balances of roughly $14 billion, had credit card revenues of $1.75 billion last year, an amount substantially greater than the bank makes from mortgage and personal lending combined. Long-term growth has been phenomenal.
As of this January, the outstanding credit card balances of Canadian banks totalled $52 billion, more than five times greater than a decade ago.
Expect compulsive spending disorder to recur, weakening our already recessive savings gene. The recent blip in the personal savings rate cannot mask the fact that it has been falling steadily since the 1980s, when it was close to nine per cent of disposable income. By 1998, it was a shockingly low 0.7 per cent.
Canadians have ample reason to save. Public pensions and benefits are modest and company pensions hardly provide adequate retirement income, but so far they’ve shown scant inclination to consistently put money aside. Either they develop some serious savings discipline, or acquire a taste for Alpo.