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by Anup Srivastava, Felipe Bastos Gurgel Silva, Luminita Enache and Manuela Dantas, The Conversation
Image credit: Pixabay/CC0 Public Domain
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Image credit: Pixabay/CC0 Public Domain
The COVID-19 pandemic is no longer a global emergency, Canada's GDP exceeded expectations in 2023, the economy appears to be heading for a soft landing after a period of stagnation, inflation is easing and unemployment is at 5.7 in January 2024 % down – just below pre-pandemic levels.
Despite these positive economic indicators, recent polls suggest that Canadians are dissatisfied with the direction of the economy. An overwhelming 84% of Canadians believe the country is already in a recession, and 73% expect a recession next year. Young people in particular are afraid of the future.
This discrepancy begs the question: Why are Canadians' sentiments so at odds with economic indicators? As economists, we have identified several reasons that explain why this gap exists.
1. Growing socioeconomic divide
Both income and wealth inequality are increasing alarmingly in Canada. The richest 20% now account for more than two-thirds of net worth, compared to 2.7% for the bottom 40%.
The top 20% accounted for 40.3% of net disposable income in 2023, while the bottom 20% accounted for just 6.1%. Meanwhile, the top 1% of workers have become even richer.
In contrast, the number of people in the low-income marginal group continues to increase. The net savings of the lowest-income households fell by 9.8% in the third quarter of 2023 compared to the previous year.
2. Debt service charges
Since the start of the pandemic, the net savings of all but the highest earners have worsened, as lower-income renters and families tend to spend more than they earn on essentials.
Canada currently has the highest household debt to disposable income ratio of any G7 country. With current high interest rates, the interest burden on private households in relation to disposable income has recently reached its highest level in 12 years.
3. Interest rates
The average disposable income of the top 20% of Canadians is rising the fastest of any income group. This means those with financial assets benefit from rising interest rates, while those at the bottom suffer the burden of higher debt service.
4. Housing costs
Skyrocketing home prices have outpaced incomes and mortgage rates have risen dramatically, resulting in the lowest home affordability index in 40 years. For many people, the dream of owning their own home seems further away than ever.
5. Effects of Inflation
Although the inflation rate in Canada is showing signs of slowing, it still remains quite high. In June 2022, it reached a 39-year high of 8.1%, hitting people in low-income groups hardest.
6. Growing corporate concentration
Canada's most concentrated industries are even less competitive and the number of highly concentrated industries is increasing. The profit margins and markups of already profitable companies are increasing.
This trend negatively impacts consumers and society in general as it reduces industry dynamism, resulting in fewer choices and higher costs.
We are currently seeing this in the food sector, where a lack of competition has led to higher food prices. For the same reason, airline tickets and cell phone bills remain higher in Canada than in comparable countries.
7. Mental health issues
The proportion of people reporting very good or excellent mental health fell from 72.4% in 2015 to 59% in 2021.
The prevalence of some chronic diseases, including high blood pressure, heart disease and obesity, also increased from 2015 to 2021.
Financial anxiety, pandemic-related stress and other issues are generally making Canadians angrier, affecting their outlook on life and the economy.
8. Long COVID
While the impact of the pandemic is slowing, long COVID is still a major concern for many. One in nine people who have been infected with COVID-19 experience symptoms such as brain fog, cognitive impairment, fatigue and shortness of breath, which impact their health and well-being.
It is short-sighted to assume that we have all recovered equally from the pandemic while some people are still affected by it.
9. Cuts in higher education funding
Higher education has historically served as “the great equalizer” and as a tool for social mobility between generations. However, with declining government support for post-secondary education, this may no longer be the case.
The financial situation of many universities is becoming increasingly precarious, meaning post-secondary institutions may increase their tuition fees or rely more heavily on international students to meet their budgets, both of which impact domestic students.
It is becoming increasingly difficult for students from the lowest economic class to trade the security of a job straight out of high school for the high cost of a college or university degree. This, in turn, reduces their chances of moving up the socioeconomic ladder.
10. Youth fights
Young people across North America are more anxious about their future, worried about their mental health and educational prospects, and more disillusioned with politicians than previous generations.
Although Generation Z is resilient and pragmatic, they are pessimistic about the world around them and the future. They worry about their financial security because rent and food costs are high.
A 2023 Globe and Mail poll found that nearly three-quarters of Generation Z did not think they would surpass their parents as a generation. 56% feel anxious, sad, anxious and powerless in the face of climate change, while 78% said climate anxiety is impacting their mental health.
Navigating the Separation
While more than 40% of Canadians hope for positive outcomes in 2024 and macroeconomic indicators show prosperity, there are numerous factors that are causing dissatisfaction among large parts of Canada's population.
Managers, business leaders, policymakers, government officials and economists should all pay close attention to this issue. Over-reliance on aggregate indicators such as macroeconomic prosperity to make strategic, investment, hiring and financing decisions can lead to unexpected results and challenges.
For example, a real estate company might decide to invest in a large, affordable housing project based on economics. While the initial logic may seem reasonable – if the economy is doing well, there should be huge demand for housing – problems could arise if the target population is financially strained and cannot afford the housing.
A comprehensive understanding of the mindset, risk preferences and motivating factors of key customers, stakeholders, investors, employees and voters is essential to making informed decisions that benefit everyone involved.
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