Canada is becoming more vulnerable to any new global financial shock as the recovery slows and consumers go ever deeper into debt.
The sharp rebound immediately following the recession has slowed - the economy expanded at an annual rate of just 1 per cent in third quarter - and the Bank of Canada and others have been warning repeatedly that consumers are borrowing too much and should prepare for an inevitable rise in interest rates.
"The third quarter's sharper than anticipated deceleration in GDP growth has increased the economy's vulnerability to additional shocks, which could spark a renewed downward spiral," writes Mark Hopkins, a senior economist at Moody's Analytics.
"In addition to external threats of a European debt crisis or a slump in global trade, the greatest emerging risk to the recovery may come from Canadian households' finances. Fresh data show household debt grew at a strong 6.7-per-cent pace in the third quarter; debt now exceeds 150 per cent of personal disposable income. With home prices slowing and even declining in some provinces, this rapid rise in household leverage raises the odds that a global financial shock would spark a solvency crisis of the sort that has plagued the U.S. since 2007, something Canada has managed to avoid so far."
Mr. Hopkins was not being alarmist in his commentary on Canada. - he was simply pointing out a growing vulnerability. He noted, too, that the country is still in better shape than most of its G7 counterparters, and that the average homeowner has enough equity in his or her house, while stronger markets are boosting net worth and low interest rates are holding down debt servicing costs.
Others have taken a harsher tone since the double punch Tuesday by Bank of Canada Governor Mark Carney, who warned again on high debt levels, and Statistics Canada, which reported on just how high they are now.
"While the pace of credit expansion has moderated, as Mr. Carney points out, it continues to surpass the growth in both income and assets," said David Rosenberg, chief economist at Gluskin Sheff + Associates.
"In fact, the Canadian household debt-to-disposable income ratio jumped from 145 per cent to 150 per cent in [the third quarter]- new record high, and not to mention higher than the ratio at its peak in the U.S. during the credit binge! What was even more startling was the size of the quarter-over-quarter surge - we haven't seen such a jump since the current data series started (in 1990). "
Mr. Rosenberg also noted that while Mr. Carney was warning consumers, all indications are that further rate increases are some way off.
The big news Tuesday, of course, was the fact that on the key debt measure, Canadians are now worse off than Americans. Still, not everyone is biting their nails.
BMO Nesbitt Burns has pointed out that it may not be as bad as it appears, given that financial assets have also gained in value and the savings rate is also growing.
And yesterday, National Bank Financial's chief economist, Stéfane Marion, also put things in perspective.
"While the growing indebtedness of Canadians certainly warrants scrutiny from our monetary and fiscal authorities, we do not think that conditions in Canada have deteriorated to the point of jeopardizing the economic expansion," he says.
"While households are certainly more vulnerable to higher interest rates going forward, the fact remains that most mortgages in Canada are at fixed rates. Also, since the tax system in Canada does not allow for mortgage interest deduction, households tend to hold a much greater share of equity in their homes."
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