As inflation soars and wage gains lag, households purchasing power is expected to diminish over the next several years and act as a drag on GDP growth, according to a new report from Scotiabank Economics.
The firm said that, with prices continuing to rise faster than wages, the purchasing power of households is projected to decline by 3% over the next three years.
“This is expected to lead to a cumulative decline in real GDP of 0.6% over that time, along with a reduction of 1.4% in real consumption, and an associated reduction in imports,” the report said.
The biggest impact on economic growth is expected to materialize in 2023, with the decline of purchasing power shaving 0.3 percentage points from GDP growth, following a 0.2-point decline this year.
At the same time, Scotia said wage growth is expected to start catching up to inflation in 2023, which would “eventually restore purchasing power by the end of 2025/beginning of 2026.”
However, if inflation were even stronger than forecasted, the negative impact on GDP would be larger, the report noted.