Economic crisis: generations X and Y will be the most affected
Far more vulnerable to debt than Boomers, Gen X and Millennials could pay the price of the pandemic crisis.
COVID-19 crisis has dramatically revealed the vulnerability of certain categories of the population. Three million jobs lost in Canada since the start of the pandemic, 400,000 in Quebec, the province hardest hit.
Obviously, not all are equal in the face of such a blow of health firedamp: workers in the tourism and catering sectors have been cruelly affected (and still are) while workers working in the public sector, for example, have been able to more easily convert to telecommuting. Some are feeling the pandemic crisis more acutely than others and they will find the coast of resilience more difficult to climb, as indicated by unpublished data released by Statistics Canada on June 26. This new version of its Economic Accounts for the household sector has been updated for 2019 but, above all, offers an unprecedented breakdown of income, consumption, savings, and wealth according to the different generations.
What is heritage? Simply put, it is the sum of assets held, such as a portfolio of stocks, adjusted for debts - a mortgage, for example. This is what you might call an individual's “net worth”.
What is particularly rich with Statistics Canada data is that for the first time, we can really assess the wealth of each generation and follow its development from 2010 to 2019. These unprecedented data contain diagnoses by generation really interesting. Let us focus on some of the most important in the case of Quebec.
First observation: In Quebec, baby boomers hold the largest share of wealth, but the gap between them and the younger generations is narrowing.
The share of the net worth of baby boomers in Quebec has indeed remained relatively stable, going from 52.0% of the total in 2010 to 49.7% in 2019, while that of millennials increased from 2.5% in 2010 to 8.3% in 2019. Generation X's net wealth almost doubled over the same period, from 16.4% in 2010 to 27.4% in 2019. These increases were offset by the decline in wealth of the elderly, dropping from 29% in 2010 to 14.6% in 2019 - a drop that can be explained by the withdrawal of their assets for their retirement.
All this conforms to what in economics is called the “life cycle theory”. According to the latter, at the beginning of adulthood, a person borrows to finance his major expenses, he then participates actively in the labor market and devotes a significant part of his income to build up savings in order to repay his loans and to protect herself from the drop in her income at the time of retirement, during which time she will spend money to maintain her standard of living.
This theory is now considered too global because it erases income levels. It was therefore then refined to take into account the specific behaviors of low-income people, members of the middle class, and those from more affluent backgrounds throughout their life cycle. Basically, low incomes don't save or unsave while the rich almost never unsaving, unless there is a major stock market shock. The middle class, on the other hand, follows the conventional model of the life cycle.
Second observation: Young people are more vulnerable to future crises than older generations
In the event of an increase in interest rates, the younger generations are more likely to be financially strangled because of their very high debt ratios relative to their income: 220% in 2019 for Xs and 200% for millennials. It doesn't leave much room for maneuver if an interest rate hike occurs because this threshold is already considered critical in times of low money rent. In contrast, in 2019, the debt ratio of baby boomers was nearly 165%, and that of Quebecers born before 1946 about 50%.
New data from Statistics Canada also tells us that the COVID-19 health crisis is likely to affect Gen Xers and Millennials more severely in the coming years, as the pandemic has had a particularly negative impact on the type. jobs held by them. Indeed, these generations derive their income mainly from wages, while the older generations mainly receive fixed income from retirement benefits and Old Age Security. As the pandemic has been devastating for several sectors of the economy, it is the young generations, very active in the labor market, who suffer.
Third observation: Consumption habits make young people doubly vulnerable, especially during COVID-19.
We saw above how problematic the debt levels of the younger generations were - the average debt of people aged 55 and under was twice their income!
The additional light on consumption by generation offered by new Statistics Canada data is not reassuring when compared with the debt situation mentioned above. These data show that Generation X households spent an average of about $ 100,000 in 2019, followed closely by Millennials and Baby Boomers. This very high level of expenditure increases vulnerability in the event of job loss. These people who, under more lenient economic conditions, have incurred significant financial obligations are now stranded if they lost their jobs due to the pandemic crisis. Income drops or stops, but you have to keep paying the mortgage, the electricity bill, and credit card balances!
In conclusion: a well lit amber light!
The unpublished data published by Statistics Canada provides us with a first insight into the breakdown of wealth, debt, and consumption. The data for Quebec show us how uncertain the financial outlook for Generation X and Millennials is. Unless there is a change in behavior regarding their consumption habits, a rise in interest rates could have catastrophic consequences for many of these highly indebted households.
The pandemic crisis has obviously made the situation even more perilous as many households, already heavily indebted, could become insolvent in 2020 following job losses and a fall in income. We can therefore reasonably assume that we will not see any improvement in the financial situation of households before the second half of 2021 when economic activity is expected to pick up again.
Unless, of course, the second wave of COVID-19 comes to disturb this fragile scenario ...