The Canadian economy has found itself perched on the edge of a second recession, according to a new report by Moody’s Analytics. The study, titled “Storm Clouds Gather Around Canadian Consumer Debt” is ominous indeed, stating a 20 per cent chance of looming dark economic times.
Household Debt Levels Are To Blame
What put us in this precarious position? You guessed it – those household debt levels. Just last month, Canadians hit an eight-year high with their borrowing costs – according to Equifax Canada, we’ve been shelling out funds we don’t have increasingly each quarter. This leaves us with an average debt to income ratio of 150 per cent – and no contingency plan should the current historically low cost of borrowing go up (and it will)!
“The situation that Canada faces is much riskier than in 2007-2008 when the first global financial crisis occurred,” said Mark Hopkins, a senior economist at Moody’s Analytics and one of the authors of the report, in a statement to the Canadian Press. “Right now it all depends on the household sector and the household sector is overstretched, especially compared to historical trends,” he adds. This might have you wondering – why the sudden urgency with our debt levels?
Rescue Spending Isn’t Likely
Enter the wildcard of inflation growth, which has had a poor showing with only 1.3 per cent growth reported in July – failing to hit the requisite 2 per cent for the third quarter in a row. When the economy shuffles its feet, the onus falls to Canadian households to pull it out of the hole with healthy spending – but with funds stretched so tight, there’s little room for consumers to bail us out.
There have also been recent reports that delinquency on consumer debt is low – but this may not be the case for much longer! Holding such high levels of credit leaves consumers vulnerable to an impending Bank of Canada interest rate increase. While the rate didn’t change in the September 5 announcement, and isn’t poised for movement until the end of 2013, Canadian households are in for increased pressure on their wallets, as debt servicing costs (ie paying back all that credit at a higher interest!) will take a lovely chomp out of their take-home pay.
Ignoring the Warnings
Even scarier is the proof that our debt habits show no sign of slowing down. Despite Mark Carney’s constant hand wringing and CMHC-enforced mortgage rules put in place to hamper debt levels, at least two studies show that Canadians just aren’t heeding the warnings. Case in point: TransUnion’s report that consumer debt is actually growing due to auto loans (followed closely by credit card debt), as well as Equifax Canada’s latest findings on consumer indebtness growing 1.3 per cent year-over year.