Canadian Disposable Income Drops For A Second Consecutive Quarter

Canadian household budgets aren’t just getting hit by inflation — they’re taking home less too. Statistics Canada (Stat Can) data shows household disposable income contracted in Q4 2021. This is the second consecutive quarter disposable income dropped, and it’s been a significant decline from the peak. Not great, but expected as the economy improved and government support was reduced. 

Canadian Households Have Seen Disposable Income Drop For 2 Quarters

Canada’s economy is expanding but households are finding themselves with less money.  The seasonally adjusted annual rate (SAAR) of disposable income came in at $1.425 trillion in Q4 2021. It was down 1.32% from the previous quarter and was the second consecutive quarterly drop. Annual growth was still positive at 2.66% higher, but it’s a number smaller than the lofty inflation seen.

Canadian Disposable Income

The seasonally adjusted annual rate of disposable income for Canadian households.

Source: Statistics Canada; Better Dwelling.

Household Disposable Income Is Now 3.6% Lower Than Peak

Household income might be up on an annual basis in nominal terms, but it’s down from the recent peak. Disposable income peaked in Q2 2020, and the most recent quarter was 3.58% lower than the peak. Keep in mind this isn’t just adjusting for elevated inflation, but it’s also not population adjusted. For example, the annual labor force growth was 1.55%. This means Canada used significantly more economic units to generate small growth. 

Reduced Government Transfers Behind Disposable Income Drop

The decline is primarily due to the decline of government transfers, a.k.a. pandemic supports. If you recall, government transfers doubled the income lost in Q2 2020. Support programs like CERB replaced every dollar of income lost with two dollars. As the economy recovered, criteria for these programs tightened. Along with that tightening came a reduced need for government support.

Stat Can confirms that belief with their notes on the recent data. “Government transfers to households as a proportion of disposable income fell to 19.1% in the fourth quarter, marking a return to pre-pandemic shares of less than 20%,” wrote the agency. 

A drop in disposable income isn’t great but it wasn’t unexpected. Generous income supports artificially boosted disposable incomes, which were expected to drop as the programs disappeared. Since then, the economy has retaken its output level, but many industries are still at reduced capacity. As more industries normalize, they’ll bring the potential for higher wage growth. At the same time, they’ll bring more inflation that will have to balance non-productive growth.