Canadians have started to save more, suggests a new report from TD Economics, but it will take some time before measures of household debt return to historic norms.

In its report, TD says that, notwithstanding the focus on the high absolute level of household indebtedness, “it is apparent that households in Canada have shifted towards greater thrift.”

It notes that savings rate measures indicate “that households have recently become more frugal.” Industry data also confirms that households are putting money into financial assets, it says.

“Quarterly financial flows data are quite choppy, but if you add up flows over the past four quarters, and compare it to previous four-quarter periods, it is clear that flows into financial assets which would typically be thought of as ‘savings’ (i.e. equities and investment funds, debt securities and insurance and pensions) have been increasing,” it says.

In the past four quarters, the biggest increase in flows were into equity investment funds/debt securities, it says. However, flows into this category are historically quite volatile, it cautions, adding that, over the past eight quarters, the biggest increase in flows has been into currency and deposits.

This trend, it suggests, “… likely speaks to the high degree of uncertainty about the economy and financial markets that has persisted since the recession. Households are choosing to keep a significant share of their savings liquid. Currency and deposits as a share of financial assets remains elevated above its pre-recession levels.”

At the same time as savings are increasing, TD notes that, “Households have also dramatically pared back their debt accumulation, and repayments of mortgage principal have also increased.”

In the coming quarters, TD says it expects to see an initial pullback in savings rates. “In the near term, we would expect the savings rate to tick down as consumer spending picks up from the very weak start to the year,” it says. However, it expects savings to start to increase again in 2014 “as personal income growth increases alongside better economic growth, while high debt levels keep consumer spending growth comparatively modest.”

“Looking further out to beyond 2014, the expectation of higher short-term interest rates in Canada will provide support to the savings rate,” it forecasts. “Lastly, there appears to be little scope for rising asset values to take pressure off households to set aside cash for savings over the next several years. In particular, home prices look likely to remain relatively stable over the next several years and equities to turn in only moderate returns.”

Ultimately, it expects the personal savings rate to rise further to around 6% by the end of 2016.

That said, “despite this shift to thrift, Canadian households remain highly leveraged, and it will take quite some time for measures of leverage to return to historical norms,” TD acknowledges.

Also, given concerns about adequate retirement savings, it says that while higher savings rates represent a good step, “the moderate jump in savings is unlikely to address the broader challenge of insufficient retirement savings for a large slice of Canadian households.”

“So while the increase in the savings rate indicates that consumers have turned the wheel in the right direction, it is going to take a lot longer to turn their financial boats around,” it concludes.