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'Substantial minority' of Canadians will struggle if rates rise

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Mortgages emerge as top debt threat

Are Canadian households in decent enough financial shape to absorb the shock of higher interest rates?

Recent trends indicate a growing portion of households are beginning to hunker down. Consumer credit – such as credit cards and personal loans – grew at just 2.3 per cent on a year-over-year basis in February, with all types having either decelerated or outright declined.

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While that's led to a reduction in the growth of total debt, mortgage debt growth continues to expand, growing at an almost constant 7.8 per cent year-over-year pace for the last three years, notes Toronto Dominion Bank economist Francis Fong.

"The challenge lies in that mortgage credit seems unyielding and income growth is simply not sufficient to bring down the debt-to-income ratio, leading to an increasing level of vulnerability among households," he said in a report.

His conclusion: "While a majority of Canadians appear to be well-positioned to absorb a rate increase of around two percentage points, there is a substantial minority that cannot."

See Chart: Household spending by credit type

Trouble for tech

The global economy has shown remarkable robustness over the past year, despite the debt-related turmoil in Europe.

Real GDP internationally expanded by 3.7 per cent in 2011 and the Bank of Nova Scotia expects it to grow by 3.5 per cent this year. That's in line with the average growth rate of the past four decades, notes Scotiabank economist Carlos Gomes.

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But austerity measures in the euro zone are starting to have a negative impact on spending plans, notably in the information technology sector, he says.

He believes there is "huge uncertainty for business and consumers, prompting them to become more cautious in spending on IT products and services."

Growth in global tech spending should slow to about five per cent in 2012, he estimates. That would represent a significant drop from the near double-digit increases over the past two years, he says.

Look for spending in Western Europe -- the second largest tech market, with roughly 27 per cent of the global total -- to decline this year, a major pullback from an average of five per cent growth over the past two years, he adds.

Asia and Latin America are likely to remain the tech growth leaders.

"However, even in these nations, tech spending is expected to moderate to singe digits from the double-digit pace of the past two years."

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See Chart: Technology spending to moderate

Wanted: real earnings growth

For sustained economic growth, you need solid domestic demand.

And a key factor helping lift demand is the rate of growth in employees' earnings.

In Canada, there's a worrying trend, says economist Adam Goldin of Moody's Analytics. Nominal earnings rose in February versus a year ago, but the increase was below the rate of inflation, reducing purchasing power, he says in a recent report.

The inflation rate has been falling along with nominal earnings, so at least the gap has not been widening. The bad news is that inflation's descent has likely ended.

Compounding the problem is that consumer spending has been kept aloft by increased borrowing instead of real wage gains.

"If Canada's recovery is to be sustained, consumers will need real wage gains since a dwindling savings rate and additional borrowing has fuelled consumption over the past several months," writes Mr. Goldin.

With the prospect of heightened U.S. demand for Canadian exports, there should be a firming of employment and earnings trends, but he warns that "lagging productivity and the strong loonie remain competitive threats that will weigh against stronger job growth."

See Chart: Wage gains

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