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morning business briefing

Briefing highlights

  • Interest costs to rise: RBC
  • What to watch for today
  • Global stock markets sag
  • New York poised for soft open
  • Loonie at about 74.5 cents

Bloated

If you’re one of the many Canadians who spent the past few years pigging out on debt, here’s a reminder from Royal Bank of Canada’s economics department (not the collection folks):

You have to pay for carrying that debt, and the cost is going to rise.

Canadian households closed out 2016 with outstanding balances topping $2-trillion, having added $99-billion in mortgages and consumer credit through the year, noted RBC economist Laura Cooper.

And because our incomes couldn’t keep up with our borrowing, we now owe $1.67 for every dollar we were bringing in as of the third quarter of 2016.

This has been a huge issue in Canada, whose household debts, as a percentage of the economy, are the steepest among Group of Seven countries.

The pace of mortgage growth is now slowing amid government measures to hose down housing markets, Ms. Cooper noted, though consumer credit is still running at about the same rate.

“With mortgage loans accounting for more than 70 per cent of outstanding debt balances, the slowing is an encouraging development and is helping to dampen overall household debt accumulation,” she said in a new report.

But the low interest rates that have fuelled our nasty habits are going to rise, though slowly.

“The required payments on rising debt loads have remained broadly stable as a share of disposable income in recent years as declining interest rates offset the costs associated with higher debt balances,” Ms. Cooper said.

“Interest rates are expected to rise gradually and still remain at historically low levels, but our estimates indicate debt servicing costs could rise to 16 cents for every $1 of income by 2018 from 14 cents currently,” she added.

“This would represent a record high with two-thirds of the increase attributed to rising interest payments as borrowing rates climb.”

And here’s a little salt for your wounds: “Households could feel an additional squeeze from rising energy costs – which currently sit at a near record low 6 per cent of household spending. This confluence of factors together suggest the contribution of household spending to economic growth will ease, albeit only modestly in the near-term.”

No need to fret too much at this point, Ms. Cooper said, because Canada is still creating jobs and incomes are still rising.

But the pace of growth in consumer spending could nonetheless slip next year to the slowest since the 2008-2009 recession, she forecast.

What to watch for today

Federal Reserve chair Janet Yellen will cap what has been a dramatic week for the U.S. central bank with an afternoon speech in Chicago.

Dramatic because Ms. Yellen’s colleagues have spent the week altering the rate-hike scenario.

Several Fed officials have been out and about, suggesting the next increase to their benchmark rate could come March 15, comments that buoyed markets and pushed up the U.S. dollar, thus helping to push down the loonie.

“The market is looking to Yellen’s speech [Friday] to provide the final push that leaves little doubt the Fed will lift rates again on March 15,” Ms. Cooper’s American colleagues said in a lookahead.

“With the ‘quiet period’ ahead of the [Fed] meeting quickly approaching, this is likely to be the last opportunity to communicate its intentions,” they added.