Interest rates have been low for so long that we forget the good things happening when they rise.
In a massively indebted place like Canada, rising rates can fairly be described as trouble waiting to happen for both households and governments. But higher rates are caused by positive economic developments like a firming job market and rising wages.
After years of sluggish increases, wage growth picked up noticeably at the end of 2017. If the pattern holds, and it will if job creation stays strong, then households facing higher borrowing costs will have some help.
A lot of people need that help. With striking consistency, recent polls and surveys have shown a high level of stress about money. The latest, from the personal insolvency firm MNP Ltd., suggests four in 10 people are afraid they will be in financial trouble if interest rates go up much more.
Higher rates are already happening. The increase announced Wednesday by the Bank of Canada brings the cumulative growth in rates over the past six months to 0.75 of a percentage point, with more likely coming in 2018.
Increases like these influence rates on mortgages, lines of credit and floating-rate loans. If you haven't already done so, now's the time to strategize about how you'll absorb higher monthly costs. Pick some key expenses to cut back on in the year ahead and let the economy do its part to help through higher wages.
Prior to the final three months of 2017, we had not seen wage increases of any size in years. Weekly wages rose an average of 1.6 per cent in 2016 and 1.9 per cent for all of 2017. In the fourth quarter, though, wages rose by an average of 2.7 per cent. Benjamin Tal, deputy chief economist at CIBC World Markets, said wage increases would be a significant offset to the cost of higher interest rates if they remained at 2.7 per cent.
Mr. Tal is an optimist about the job and wage situation. In a report issued last week titled The Canadian Labour Market – Even Better Than You Think, he argued there's more to the employment picture than the surprisingly good job-creation numbers in 2017. Because the job market is so strong, after-inflation labour income is rising at its fastest rate in five years.
Labour income is built on wages and labour composition, which refers to the makeup of the work force in terms of higher- and lower-paying jobs. "Income can rise two ways – where everybody gets a wage increase, and also where the jobs being created are at the higher end of the market," Mr. Tal said. "Today, more jobs are being created in high-paying industries."
There are doubters about the economy and the sustainability of the strong employment situation. They see job creation and, presumably, wage increases losing momentum as economic growth slows to a more modest level later this year.
Even if wage increases continue at current rates, some of the country's most indebted people may not fully benefit. Mr. Tal said younger workers – the ones with the biggest mortgages – tend not to have the most bargaining power in the workplace and thus may not get raises at the same rate as older, more established employees.
Still, wage increases close to the 2.7-per-cent level of late last year would be welcome news for households struggling to juggle higher interest payments. Inflation in November, the most recent month for which there is data, came in at 2.1 per cent. That leaves a real, or after-inflation, wage gain of 0.6 per cent. Not huge, but consistent with historical averages.
The need for these gains can be seen in MNP's quarterly Consumer Debt Index, which suggests the number of people who can't afford their monthly bills and debt payments is rising. One-third of the 2,001 people surveyed said they were in this position, up 8 percentage points from September. The backdrop here is the one-two punch of rate hikes last July and September.
Wage increases will help offset the impact of rising interest rates, but you may need to do more. Suggestion: Create a rising-rate action plan for your household, with three expenses you can reduce or cut completely to make room for higher borrowing costs.