The Word of the Year for 2023 might be “AI,” but for Canadians looking at their finances, “volatile” might work just as well.
This year, rising living costs devoured paychecks and pushed many households further into debt. The Bank of Canada increased its key lending rate three times, driving up the cost of variable-rate mortgages, car loans and lines of credit. The battle with inflation, in Canada and abroad, provided a bumpy ride for investors and is still fuelling fears of a recession.
The bad news: all of these concerns will carry over into 2024. The good news: most of them should recede into the background once inflation is finally stuffed back into its cage.
Let’s take a look at six economic issues that are likely to impact your finances next year and consider some ways you might prepare for them.
1. So, where’s that recession?
Shannon Terrell: Economists continue to bicker about whether Canada is in a recession, but most financial experts agree that a downturn is underway. Labels aside, what’s more important is what Canadians can expect in 2024.
Some say the Canadian economy will see only modest growth in 2024, propped up by relatively strong savings and employment rates this year. Other economists are less optimistic, citing a prolonged economic slowdown in 2024 followed by a rebound starting in 2025.
Although we don’t know how long it will take the Canadian economy to improve, a full recovery is a safe bet. There have been 12 other recessions in Canada since 1926 and the economy has always bounced back.
How to handle it: The rising cost of living has battered Canadian wallets. But if you have a few dollars to spare monthly, consider setting them aside in a high-interest savings account as an emergency fund. Everything counts, and an emergency fund can be an indispensable cushion that protects your finances from freefall should you lose your job.
2. Mortgage rate uncertainty
Clay Jarvis: Canada’s housing market is essentially the story of how much money people can afford to borrow. If both fixed and variable rates come down in 2024, the next chapter could be a real page-turner.
In 2023, home sales increased when five-year fixed rates were below 5%. If fixed rates dip below 5% next year — and we’re not in a full-blown recession — it’s likely Canadians will return to the market fairly enthusiastically. The pent-up demand and FOMO will be too strong for many to resist. Let’s just hope inflation hasn’t eaten too big a hole in everyone’s down payment savings.
How to handle it: If you’re waiting for rates to fall before exploring the market, use the down time to turn yourself into a stronger mortgage applicant. Paying off debts and ramping up your down payment savings can shave thousands of dollars off your mortgage over the long term. Getting pre-approved for a mortgage a few months before you intend to buy can help you move quickly if the market suddenly heats up and becomes more competitive.
3. Elevated inflation may linger through the summer
Shannon Terrell: Headline inflation continues to hover between 3% and 4% — an improvement from the cringe-inducing 8.1% peak Canadians saw in June 2022, but we still have a ways to go. As price growth consistently exceeds the 3% ceiling set by the Bank of Canada, we’re reminded that pandemic-induced inflation has been far more buoyant than expected. Despite numerous rate hikes, the uncomfortable truth is that it takes time for price growth to slow. The Bank of Canada believes inflation will hover near 3.5% until mid-2024 and settle between 2% to 3% by 2025.
How to handle it: Strategic shopping may soften the crush of high prices in spending categories where inflation has proven stickiest, like gas and groceries. To save money, consider buying in bulk, comparison shopping, using coupon apps and scouting for sales. A credit card that rewards everyday spending may also come in handy.
4. Heavy debt loads could slide into default
Clay Jarvis: It’s hard to be optimistic about Canadian debt levels heading into 2024.
In September, market data painted a fairly stark picture of the country’s debt situation, citing record-high credit card balances, and growing delinquencies among auto loan and home equity line of credit borrowers. People who took on credit when variable interest rates were low have been hammered by elevated rates in 2023.
There won’t be any relief until the Bank of Canada begins reducing its overnight rate, and that might not be until spring. Decreasing inflation could allow some borrowers to put extra cash toward their lingering debt, but that won’t be enough to ward off a further rise in delinquencies.
How to handle it: If debt is pulling your finances in too many directions, 2024 might be the year to consider a debt consolidation loan. Replacing multiple debts with a single loan can help you secure a lower interest rate and reduce the number payments you have to manage. Taking on debt to pay off debt isn’t a risk-free solution, so it’s important to understand a loan’s details before deciding it’s the right option for you. Speak to a credit counsellor or a financial advisor at your bank if you need more clarity around how debt consolidation might affect you.
5. Backend banking tech will come to the forefront
Shannon Terrell: The Big Six banks face increasing pressure from neobanks, as online-only players like EQ Bank and Wealthsimple continue to grow their account offerings. In response to fintech competition, more banks will adopt cloud-based systems to increase the speed with which they process consumer banking requests. What Canadians want from their financial institutions will continue to evolve as Generations Z and Alpha enter the workforce and explore their banking options. Continued talk of a central bank digital currency will likely see an increased emphasis on digital banking security into 2024 and beyond.
How to handle it: As competition heats up between financial institutions, don’t hesitate to take your business elsewhere — especially if you spot an account with better rates or fewer fees. Online banks continue are offering more products and services, and you could save or even make money by shopping around.
6. Travel will continue to rebound
Clay Jarvis: Canadians spent big on travel in 2023. In the second quarter alone they dropped nearly $16 billion on domestic tourism. In August, they took almost 5 million trips abroad.
Whether travel spending returns to pre-pandemic levels in 2024 will depend on two competing factors: Lower inflation, which might help travellers justify spending more on their trips, and high debt levels, which could force many to consider putting their travel budgets toward ballooning credit card balances.
The former is likely to be the stronger motivating force, though. Adventure is generally a sexier choice than a lower credit card balance.
How to handle it: A good travel credit card can make vacations more convenient, secure and comfortable. But even the best travel card loses value if it regularly leads to unpaid balances and ongoing interest charges. When shopping around for a travel rewards card, be sure to weigh annual fees, earn rates and any bonus offer spending requirements against what your budget can afford.
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