Financial Stress: Hard Times

Financial Stress: Hard Times

It’s not easy these days to get out of the financial game when your wallet is getting hit from all sides.

Interest rates are going up. The stock market is in correction. The bond market is falling. Buying a first home is becoming less and less accessible. Inflation remains high. Products are getting more and more expensive. Savings are visibly melting away among middle-income households. Wages are not increasing enough. Companies are victims of labor shortages. Refueling is extremely expensive.

Financial stress is at its peak these days. Unfortunately, this is likely to continue for quite some time. We might as well take our troubles patiently! It would be surprising if the financial situation changed drastically in the short term.

The invasion of Ukraine by Vladimir Putin will continue, economically speaking, seriously affecting the entire world. And when the war ends, the economic fallout will be pervasive for quite some time.

Here are the six things that concern me:

1. GASOLINE BURST

The price of gasoline at the pump continues to rise. In Montreal yesterday, the liter of regular gasoline reached 205.9 cents. This is 68.7 cents more than the average retail price (137.2 cents) per liter in 2021. We are therefore talking about a spectacular increase of 50%.

Compared to the average price (106.92 cents) in 2020, the rise at the pump reaches 92%.

Meanwhile, the governments of Quebec and Ottawa, but more particularly Quebec, are also taking advantage of high gasoline prices to fill their coffers at the expense of motorists.

Of the 205.9 cents per liter of gasoline, 59 cents are pocketed in taxes, including 19 cents for Ottawa and 40 cents for Quebec. Regarding the taxes collected on the average price in 2021, the increase reaches 20%.

Given the summer holidays and the increase in travel that this implies, it should not be surprising that the price of a liter of gasoline exceeds 220 cents this summer.

2. INFLATION

In addition to high gas prices that are fueling inflation, there is also the rising grocery bill that is causing serious financial concerns for low- and middle-income households.

So much so that, according to the Léger-Le Journal-TVA-QUB ​​survey, about 80% of Quebecers earning less than $60,000 a year plan to cut back on their spending.

And the more specific spending items are outings to restaurants (and bars), cultural activities, car travel, and groceries.

When it comes to groceries, households with tight finances are doomed to run from one place to another in search of bargains to feed themselves as much as possible at relatively reasonable prices.

3. EMPLOYMENT

Median weekly earnings in Quebec increased by 4.9% in the last 12 months, from March 2021 to March 2022. It now stands at $1,113.94 per week, an increase of $51.73.

Annually, we’re talking here about a gross income of $57,925, or $2,690 more in 12 months.

The labor market is doing well. According to data from Statistics Canada, the unemployment rate in the province is historically low: 3.9%. There are 179,600 unemployed there.

A word of warning: the number of employees may have increased by 7.9% in the last 12 months, but companies are still unable to operate at full capacity due to labor shortages.

There are currently 259,200 job openings in Quebec. The “vacancy/salaried positions” ratio stands at 6.7%, the second-highest provincial rate in the country.

4. RATE INCREASE

To counter inflationary pressures, central banks such as the Bank of Canada and the US Federal Reserve have no choice, they say, but to raise their respective key rates.

From an initial level of 0.25%, key rates could exceed 2.0% by the end of this year.

This has the effect of pushing up the entire matrix of interest rates: mortgages, personal loans, business loans, etc.

This credit crisis will have consequences for the ordinary world of making homehomeownerships affordable, putting more pressure on heavily indebted consumers, of lowering the personal savings rate.

5. REAL ESTATE REFRIGERATION

Rising mortgage rates are likely to cool down the overheated residential real estate market. It was time.

In April, the median price of a single-family home across the province hit $450,000. This is $188,000 more than in April 2020, amid the COVID-19 pandemic. This means that in two years, the price of the “Quebec cottage” has skyrocketed by 72%.

Meanwhile, the median price of a condo would rise from $134,000 to $384,000. Up to 54% in two years.

In April, the APCIQ, which represents real estate brokers, reported a significant drop in total sales and active listings compared to April 2021.

Given rising mortgage rates, it would be surprising if the median price of single-family homes and condos continued to rise.

At Desjardins, we even foresee a drop in prices that could reach 12%.

6. MARKET CORRECTION

One of the stock market’s worst enemies is when it comes time for central banks to tighten credit by launching a series of hikes in their benchmark rates.

This credit crunch obv a negahurts of debt and the profitability of companies.

While struggling companies are likely to dig their graves, companies that are in good financial health will see their profits eroded by rising funding costs.

That’s why, faced with falling corporate profitability, or the threat of it falling, the values ​​of publicly traded companies have fallen sharply from their recent highs. With the particular exception of oil company stocks which are benefiting largely from the skyrocketing price of gasoline at the pump.

At the height of the storm last week, the NASDAQ was down 27% this year, the S&P 500 down 18%, and the Dow Jones down 14%.

After eight weeks of declines, US equity markets managed to recover this week, paring recent sharp losses by 3-4 percentage points.

During the US crash, the Canadian stock market managed to limit its losses. Still, its main index, the S&P/TSX, only showed a slight 5% drop in the worst of the storm.

Now, a good week on the stock market does not mean that the stock market correction is over.


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