Penelope Graham, Director of Content
To say 2023 was a financially volatile and challenging year for many Canadians would be an understatement. An arduous combination of rising interest rates and inflation, combined with growing recession fears, have left households largely feeling worse off, according to recent Bank of Canada data.
While there is newfound optimism that interest rate cuts could ease borrowing conditions later this year, the current cost of living remains steep, and consumers are grappling with reduced spending power and signs the economy is slowing. These sentiments influence everything from grocery lists to long-term retirement strategies – and it’s clear Canadians are concerned their budgets will be squeezed in 2024, especially if a recession should occur.
Here’s what we’re anticipating to be the key money management themes for 2024.
- Inflation, though trending lower in 2024, will continue to constrain household spending.
- Canadians are less likely to make big-ticket purchases, especially those that require financing, like cars.
- Debt repayment remains a top vulnerability to both consumers and the economy.
- Expected interest rate cuts may bring borrowers some relief.
- Savers are still looking to amp up their returns while these products remain competitive.
Prediction 1: Inflation will constrain budgets, even as it improves
Soaring inflation has been a major pain point for consumers, and the impetus behind rising interest rates, as the Bank of Canada (BoC) struggles to pull the Consumer Price Index back down to historical norms. The central bank has implemented no fewer than 10 rate hikes since March 2022 to tame inflation, which skyrocketed after the ending of pandemic lockdowns.
And the Bank has seen considerable progress here – after hitting a 40-year high of 8.1% in June 2022, CPI was reigned in to a more manageable 3.1% as of November 2023. Inflation is anticipated to keep falling as the impacts of those rate hikes continue to work their way through the economy, and should reach the Bank’s 2% target some time next year.
But lower inflation doesn’t mean it’s gotten cheaper to shop – just that prices are rising less quickly. And for cash-strapped Canadians, that spells little relief at the checkout. As a result, the BoC reports that 58.1% of households will reduce their spending this year. In fact, finds the Bank, many Canadians perceive the current inflation rate to be much higher than it actually is, because basic necessities costs – food, gas, and housing – continue to rise.
Another report based on the Q4 TransUnion Consumer Pulse survey finds that 57% of Canadians plan to reduce their discretionary spending, and that 43% say their household finances were worse than planned in the fourth quarter of 2023.
Prediction 2: Canadians will pass on big-ticket purchases
The BoC research also finds that shoppers are putting off major purchases such as large appliances, and especially those that require debt financing, like new cars; less than 10% of consumers plan to make an investment in either category this year, according to the Bank’s survey.
“Many consumers believe the impacts of higher interest rates on their household spending are far from done,” reads the report. “Those expecting more adverse effects ahead are less likely to plan major purchases. Overall, consumers reported that they are more likely to spend on discretionary items like vacations and concerts than buy items usually financed with loans, such as cars or appliances.”
Instead, the Canadians who are willing to spend cash prefer to put it toward experiences such as travel, which take up 24.3% of spending plans over the next months.
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Prediction 3: Debt payoff remains a top concern
Given how much more expensive borrowing has gotten over the past 24 months, it’s no surprise Canadians want to whittle their debt loads down as much as possible, especially high-interest loans such as credit card balances; 34.3% are focusing on debt payoff this year, according to the BoC.
But there’s also growing distress that won’t be possible. TransUnion reports that as many as a third of their respondents anticipate they won’t be able to pay their bills in the near future, especially as chances of a recession grow, and that 33% expect the size of their debt obligations to grow within the first quarter of the year.
As a result, the demand for new debt declined in 2023, and will likely continue to do so this year; the cost of new credit, not wanting to tack on more debt and the “low benefits of refinancing in a high-rate environment” were all reasons for a drop in demand for additional credit, says TransUnion.
The credit reporting agency also found that consumers were more likely to monitor their credit last year – especially younger consumers – due to economic volatility and growing fraud concerns, a trend that will likely grow in 2024.
Prediction 4: Interest rate cuts could bring – some – relief
Today’s steep interest rates continue to be one of the largest challenges facing households, as those aforementioned rate hikes have driven the benchmark cost of borrowing from its pandemic-era low of 0.25% to 5% today, in turn pushing the Prime rate in Canada – which lenders use to price their variable borrowing products – to a whopping 7.2%. Fixed mortgage rates, while not directly influenced by the BoC’s rate hikes, also soared over the course of 2023 due to volatility in the bond market.
As a result, interest-sensitive households – namely, those with mortgages – have either been significantly squeezed by rising monthly payments, or anticipate being so when they renew their mortgages in the next few years.
“Higher interest rates impact most mortgage holders, especially those with variable-rate mortgages. In an interview, one homeowner said, ‘We renewed our mortgage at a higher rate. We were prepared because we saw it coming, but the monthly payments are higher so it’s eating into our discretionary spending,’” writes the Bank.
“In addition, increases in interest rates are worsening the financial vulnerability of many households. Most homeowners’ mortgage payments are near or beyond the maximum level that they can manage without making significant spending cuts.”
The good news is that rate hikes should soon be a thing of the past.
In the Bank’s final 2023 announcement, it strongly indicated that inflation is trending in the right direction, without further need for interest-rate intervention. Market analysts are now forecasting that the central bank could start cutting rates as early as April, and could lower them by as much as 2% by the end of 2025. Should this materialize, it’ll reduce interest on products that are based on the prime rate such as variable-rate mortgages, lines of credit (including HELOCs), and even credit cards.
Also read: Ratehub.ca’s 2024 mortgage predictions
Prediction 5: Savers are still looking to power up their returns
Falling interest rates is great news for borrowers but not so much for savers – once the Bank of Canada rate starts to fall, so too will the returns on products like high-interest savings accounts and GICs.
However, given interest rates have yet to budge, these savings products remain considerably attractive going into 2024 – and consumers are keen to make the most of them. A full 39.3% of the BoC’s survey respondents intend to move their money into higher-rate accounts.
The best GIC rates today remain as high as 5%, for as low as a one-year term – a historically strong return for a conservative, passive investment.
Prediction 6: Canadians will continue to utilize registered tax-free accounts
Canadian savers love to take advantage of the tax-sheltering account features offered by the federal government, in particular to save for retirement or sock away enough for a home purchase.
New analysis released in November by Statistics Canada reveals a steady uptake in contributions to one or more of the three available registered savings accounts – RRSPs, RPPs, and TFSAs– with 58.1% of families contributing to at least one of these by 2020, compared to 52.3% in 2009.
TFSAs have been particularly popular, with the share of contributions (51.8%) exceeding those of RPPS and RRSPs combined in 2020, as well as contribution amounts.
There’s also been significant interest from savers for the First-Home Savings Account, the newest registered tax-sheltered offering which was introduced in the 2022 Federal Budget and officially made available as of April 2023. According to the federal government, more than 300,000 Canadians have since opened an FHSA, which allows savers to contribute up $8,000 per year, up to a lifetime maximum of $40,000. Money housed within the account can grow tax-free with no cap, while savers can receive a return for any contributions made during the tax year. The funds are also not taxed when they’re removed from the account, as long as they’re withdrawn for the purpose of buying a home.
The bottom line
There’s been plenty of economic volatility in the years following the pandemic, the major impacts of which continue to unwind. While Canadians have reason to be optimistic that inflation and interest rates will start to trend lower in 2024, macroeconomic concerns, such as the possibility of a recession and a cooling labour market, could heap on more financial pressure.
Whatever your money goals are for the new year, it’s a great idea to brush up on your financial literacy, and understand how different accounts and investment types can work for you. Ratehub has a handy library of both investing and banking basics to help you get started.
It’s also a great move to connect with a financial advisor, who can help you strategize the best approach for your cash flow – for example, paying more down on higher-interest debt that toward savings. Everyone's financial situation is different, so getting a personalized plan can help you make the most of your money in 2024.