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What changed in 2021? - DFSIN - SFL

What changed in 2021?

Four new financial realities that we might have to learn to live with.

December 16, 2021

While 2020 challenged the imagination and forced millions of people all over the world to change their way of life, it may be in 2021 that we have witnessed some new financial realities truly taking hold. Are these changes here for good? Who knows? But some of them are already significant enough to raise issues touching on areas such as household debt, financial security and even asset allocation.

Here are four of the new realities, with supporting figures and graphs. If you believe that any of these could affect you, it might be a good idea to sit down in late 2021 or early 2022 to discuss them with your advisor.

Inflation is back

The fact is obvious with every visit to the grocery store, restaurant or gas station: inflation is back. This is nothing to sneeze at, since an entire generation of Canadians has grown up without experiencing the kind of galloping inflation their parents lived through. From the late 1970s to the mid-1980s, our annual inflation rate often hovered around 10% – and sometimes more. It wasn’t until the 1990s that the inflation beast was finally tamed... until today.

Early this fall, Statistics Canada reported an annual inflation rate of almost 4.5%. In fact, the Consumer Price Index has been rising rapidly from its low point early in the pandemic, and was even up to 4.7% (its highest level in 18 years) at the time of this writing.

Line graph with two curves: one for the Consumer Price Index, or CPI, and the other for the CPI excluding gasoline. Both curves were at their lowest, from less than 0% to barely 1%, in the first quarter of 2020, after hovering between 1.0% and 3.0% from 2016 to 2020. After that low point, the CPI rose to 4.5%, and the CPI excluding gasoline rose to 3.5%.

Among the effects of strong inflation, three are especially likely to have repercussions on personal finances:

  • the rapid drop in buying power;
  • the eventual increase in borrowing costs (if the central banks raise their rates, as they usually do in an inflationary context);
  • the erosion of investment returns, which can happen in two ways: first, through lower net returns after factoring in the rising cost of living; second, through the bond component losing value in the event of an interest rate hike.

These effects shouldn’t necessarily prompt you to change your strategy. Nonetheless, a chat with your advisor might be a good idea.

Working from home is here to stay

Widely adopted as an absolute necessity when the pandemic broke out, telecommuting quickly became the norm, at least for those whose work could be done remotely. Statistics Canada has found that, once the pandemic began, almost all workers who could work at home did so.

Just as remarkable, as we can see here, is the percentage of Canadians now working from home who want to keep on telecommuting after the pandemic, even if it’s within a hybrid model. In the 35 to 50 age group, more than 82% of workers expressed this preference, while the overall proportion is close to 80% for the workforce in question.

Four pie charts showing the percentage of Canadian telecommuters who would prefer to work from home at least part of the time after the pandemic. This percentage is 79.8% overall, 76.9% for the 15-34 age group, 82.4% for the 35-50 age group and 78.2% for the 51-64 age group.

The most common reason given is not having to spend time commuting: no fewer than 84% of remote workers mentioned this factor. In a recent article, the Washington Post provided a calculator to quantify this component. For example, if it takes you an hour to get to and from work every day, your commute would eat up 250 hours a year. That’s 10 days or, over the course of your career, 14 months! If it takes you an hour in the morning and another hour in the evening? That’s 21 days per year. It would seem that more and more people are crunching these numbers.

Obviously, this change can also create issues with respect to work organization, workplace design, compensation mix, occupational health and safety and even taxation.

Lots of people are quitting their jobs – or not

Another phenomenon associated with opening up after the pandemic is known as the “Great Resignation.” According to some reports, more workers seem to be quitting their jobs now than at any other time in the past 20 years. A number of factors could be coming into play here. Given the context of a labour shortage, in particular, a large number of workers would quit their jobs with the certainty of finding something better elsewhere. As well, workers nearing retirement age might simply choose “not to go back” once working from home is no longer a requirement.

Line graph showing the number of people in the U.S. who quit their jobs between 2001 and 2021. While the number was about three million in 2001, it dropped to about two million in 2020, then soared to 4.43 million people in September 2021. These are seasonally adjusted figures.

However, it seems that these analyses are often based on U.S. data. A recent article in The Globe and Mail, citing figures from Statistics Canada, reported that although the labour force turnover rate in Canada has shown strong growth in the past 18 months, it wasn’t very far off its five-year historical average. Even if there’s a labour shortage, it may not mean that people are quitting their current jobs en masse.

Line graph illustrating the monthly job-changing rate in Canada since 2016. The rate constantly fluctuated between 0.6 and 0.8, before dropping to near zero early in 2020. Since then, it has simply returned to its previous level.

“To move or not to move”

Finally, remember the huge exodus early in the pandemic, when people were eager to leave big cities in favour of the suburbs or rural areas? Now that the end of the pandemic seems to be in sight, what’s happening with that? According to a survey by a large general insurance company, about one in three people still intend to move after the pandemic. The phenomenon is particularly evident in urban areas, where one resident in 10 would like to relocate to a rural or semi-rural area.

Pie chart showing the percentage of Canadians who intend to move after the pandemic. The figure is 10% for individuals in urban areas, 8% for those in the suburbs, 8% for those in semi-rural areas and 5% for those living in rural areas, for a total of 31%.

According to real estate experts, this movement can largely be explained by the prevalence of working from home, which enabled many households to move away from urban centres to places where they could afford their dream home and quality of life, without sacrificing their jobs. However, that could lead to higher real estate prices and a scarcity of houses on the market. And now that workers are being invited to come back to the office, it remains to be seen whether this distancing will still be viable, from the viewpoint of both work and personal finances.

No one knows what the future will bring, but the chances are good that these four new realities inherited from the pandemic will remain pervasive in 2022. Once again, if you think any of them might affect you, don’t hesitate to talk to your advisor.