In Canada, the gap between the rich and the poor has widened considerably, reaching its highest point since 2015. Last year, the wealthiest households experienced significant income growth, far outpacing the increases seen by lower-income Canadians.
One of the factors contributing to this growing wealth gap is the impact of higher interest rates. These rates are prompting middle- and lower-income families to tighten their belts, leading to more conservative spending habits. Consequently, the spending of top earners becomes crucial in sustaining the broader economy.
While the overall household net worth in the country rebounded by 4.5% last year, following a 6.5% decline in 2022, these gains were not distributed equally across income brackets. According to a report by Maria Solovieva, an economist at TD Bank, higher-income households benefited more due to their substantial holdings in financial assets, which were the primary drivers of wealth growth in 2023.
The disparity in household income is stark. In 2023, the average income for the top category stood at $197,909, marking a 6% increase from the previous year. In contrast, middle- and low-income households experienced stagnant growth or even a decline in income.
Low-income households saw a modest gain of 0.3%, reaching an average annual income of $31,518, while middle-income households experienced a slight decline of 0.3%, with an average income of $59,178.
The situation is compounded by challenges in the real estate market. Middle- and lower-income households faced a decline in real estate assets, coupled with increased mortgage debts. This burden was exacerbated by rising mortgage renewals and debt-servicing fees amidst high interest rates.
Consequently, these households have been forced to cut back on discretionary spending, including items like furnishings, household equipment, and recreational activities. This belt-tightening was particularly pronounced among low-income families.
Furthermore, inflation has put additional strain on household budgets, leading many families to dip into their savings to cover expenses. This trend has serious implications for future spending, as these households will have fewer resources to rely on.
Looking ahead, it's predicted that lower-income groups will continue to face tight financial constraints in the coming years, necessitating difficult economic choices and likely slowing their spending to historical averages. This slowdown in spending from lower-income households could create a drag on the overall economy.
In contrast, spending from high-earning individuals is expected to remain robust, providing crucial support for economic activity. As they maintain their purchasing power, their consumption will play a vital role in sustaining economic momentum.
