For some time, Canadian real estate and stock markets have been rising in value in the low interest rate environment despite the slow pace of domestic economic growth. Concerns are growing that the combination of high individual debt and slow economic growth are negatively impacting markets and may continue so through 2017.
In the second quarter of 2016, the level of debt held by Canadians amounted to 100.5% of the country’s GDP, up from 98.7% in the first quarter (see the graph). According to the Financial Post, it was the first time that the household debt exceeded Canada’s GDP. Persistently low interest rates have obviously encouraged many Canadians to borrow more. But, as Benjamin Tal, deputy chief economist at CIBC World Markets, noted (via the Financial Post), low growth in Canadians’ incomes is a bigger problem than rising debt levels.
The sluggish household incomes on the back of high debt levels pose a real threat in the event of economic shocks. The recent study by credit agency TransUnion (via the Financial Post) showed that 718,000 Canadians would find it very difficult to service their debt if the interest rate increased by just 25 basis points (0.25%). A potential tide of defaults in this case could trigger a financial and stock market turbulence. If struggling households decide to decrease spending to stem growing debt levels, it might create recessionary pressures on the economy.
One way or the other, these kinds of prospects may weigh on the Bank of Canada’s future decision on the direction of interest rates.
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