Wednesday, September 23, 2015

Canadians seem to love debt

Canadians have a growing love affair with debt. Household debt hit a new record in August as consumer spending jumped 2.3 % in the second quarter of the year, despite the fact that we are also in a recession, “technically” speaking.

So where is this debt coming from? Well, we’re buying houses, cars, furniture and clothing. Household credit is rising its fastest since 2012 – 80% of that is due to an increase in mortgage debt. In 2013, the pace of credit growth was 2% -- it’s now rising to just under 3%.

Retail sales has had its best start to the year in the past decade. Credit-card spending has gone up by 8% this year; spending on restaurants and fast food is up more than 12%. And we’re pouring more money into home improvements. Spending on home improvements has increased by 10% in the second quarter of the year.

So why is this happening? Being employed helps. The unemployment rate is holding steady at about 6.9%. Low borrowing costs also helps. The Bank of Canada rate is .50% and mortgages, both variable and fixed are at historical lows. In fact, consumer spending has stepped in as the fuel for the economy ever since the slowdown in our resources sector. 

Are we vulnerable?  It is indeed a concern for policy makers and it is unlikely that consumer spending can power the economy for too long. There is also a huge discrepancy among the provinces. Ontario and British Columbia are strong markets, while spending and consumer confidence have taken a hit in Alberta and Saskatchewan. Also, spending has not matched income growth. 
Higher debt loads also mean that consumers now spend an average 14% of after-tax income on their debts. This is up from 11% in 1990, even though interest rates have plunged from 14% back then to below 1% today.
So what now?  When you look at the global economy, we don’t see a pretty picture – most economies are experiencing slow growth. Because Canada depends on trading partners for much of its growth, we must wait for other countries to start their turnarounds.

Moody’s Analytics chief economist Mark Zandi had this to say in an interview in the Financial Post. “I think [consumers] feel a little bit tired,” he said “There has been a lot of debt accumulation and leverage. I don’t think Canadian consumers can lead the way for the economy.”

It’s still going to take some time. The U.S Fed recently decided to hold steady its prime rate, a tacit acknowledgement that its economy still isn’t up to growth expectations.

The Bank of Canada’s Governor Stephen Poloz has been on the talk circuit, spreading words of encouragement.

 “Canada has seen this movie before,” he said in a speech to the Calgary Economic Development, a body funded by the city and private-sector partners. “We’ve adjusted to rising prices; we can adjust to falling ones. These adjustments are never easy. They are often difficult and painful for affected individuals and their families. But they are necessary.”

Eventually, however, policy-makers and the Canadian government will need to find a way to grow the economy by boosting exports, hiking government infrastructure spending or spurring capital investment from businesses in order to give consumers a break.

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