Canada’s economy is not as “K-Shaped” as the U.S.’s is, RBC says

RBC economists say Canada’s household economy looks more balanced across income groups than in the United States, but underlying data still reveal meaningful differences in how Canadians are experiencing affordability pressures.

In a March 5 analysis, Cynthia Leach and Rachel Battaglia said weak consumer confidence, despite resilient economic growth, has puzzled economists in both Canada and the U.S.

One explanation in the U.S. has been the idea of a “K-shaped” economy, where higher-income households continue spending while others struggle. Canada appears different on the surface, but the economists said the reality is more complex.

Unlike in the U.S., high-income households in Canada are not driving overall consumption growth…

“We explore three important distributional stories around household spending, income and wealth,” the authors said, noting that the data show Canadians have faced “common headwinds and tailwinds since pre-pandemic, but also where disparities have emerged.”

Unlike in the U.S., high-income households in Canada are not driving overall consumption growth.

Between 2019 and 2024, inflation-adjusted spending declined across every income quintile. The economists said this pattern aligns with historically weak consumer confidence and three consecutive years of falling per-capita GDP.

Interestingly, higher-income Canadians reduced spending the most. But the authors suggest that behaviour reflects a shift toward saving rather than financial stress.

“Top earners were among those reducing spending the most,” the report noted, adding that many households redirected funds toward savings and mortgage repayments following the sharp rise in interest rates during 2022 and 2023.

Middle-income households showed relatively stable spending levels, but the economists cautioned that this stability may mask financial strain.

“Some spending strength among middle-income households may have been involuntary,” they wrote, noting that rising costs for essentials such as housing, utilities and food forced households to maintain spending on necessities while cutting back elsewhere.

Lower-income households faced even greater pressure. Food spending rose only modestly despite higher prices, suggesting some households substituted away from traditional purchases and relied more on food banks.

According to Food Banks Canada, food bank use rose roughly 90% between 2019 and 2024.

Income data also reveal divergence beneath headline improvements.

Most Canadian households have seen real disposable income increase since the pandemic, with lower-income groups recording the largest proportional gains. However, the economists said those improvements are uneven once the sources of income are examined.

Government transfers played a major role in supporting lower-income households early in the pandemic, but those programs have largely wound down.

Meanwhile, wage growth for lower- and middle-income groups has been inconsistent since 2021, reflecting weaker labour market conditions.

“Compensation detracted from average real disposable income growth since before the pandemic” for the bottom four income quintiles, the authors said.

Higher interest rates added another layer of pressure. Interest payments rose about 40% across all income groups between 2019 and 2024, but jumped nearly 60% for the lowest-income households, reflecting higher debt burdens relative to income.

Despite these challenges, household balance sheets have strengthened overall.

Net wealth has increased across all income groups since 2019, supported by higher savings rates during the pandemic and rising asset values.

Home prices, which are still roughly 25% higher nationally than in 2019, along with gains in financial assets such as equities, accounted for most of the increase.

Surprisingly, the economists said wealth growth has been strongest among lower-income households, narrowing the wealth gap.

“The ratio comparing the wealth of the top quintile to the bottom two has compressed from 3.2 times in 2019 to 2.1 times in 2024,” they said.

However, that trend may now be reversing as rising equity markets disproportionately benefit higher-income investors.

Looking forward, the economists said income growth for the bottom 80% of households has begun to improve, which could reduce inequality and support consumer sentiment.

Still, they identified two key risks.

The first is persistent food inflation. The economists expect food prices to continue rising by roughly 4% in 2026, which could weigh heavily on household perceptions of affordability.

The second risk stems from capital gains concentrated among high-income households. With equity markets surging — the S&P/TSX Composite Index total return index has climbed more than 70% since the end of 2023 — gains are likely to accrue disproportionately to the highest earners.

Because the top 10% of income earners typically account for about 70% of realized capital gains, the economists said strong market performance could widen wealth disparities again after several years of narrowing.

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