Are Canadians Sitting On A Debt Time Bomb?
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Report Finds Vulnerability To Economic Shocks Is On The Rise Due To Growth In Household Debt
In Canada, household debt has been rising twice as fast as disposable income over the past 15 years, and faster than growth in household assets since the beginning of the decade. Canadians are now 7 per cent more indebted than they were last year, and 20 per cent more than they were at the beginning of the decade.
While the apocalyptic scenarios about a potential collapse of the credit market may be exaggerated, a complacent approach towards the rapid pace at which Canadians borrow is similarly misleading and dangerous, according to CIBC World Markets’ January Consumer Watch report.
“Canadians have been operating and borrowing mostly in an environment of low and falling interest rates – and that’s precisely where the threat lies,” says Benjamin Tal, senior economist, CIBC World Markets, and author of the report. “Having been sheltered by cheap credit for half a decade, borrowers may have a false sense of confidence in their ability to finance their growing liabilities. The next economic shock, such as a sudden substantial rise in interest rates and/or economic slowdown would brutally expose those borrowers to a different reality. Heavy borrowing today means reduced economic flexibility tomorrow.”
Regardless of the benchmark, debt is rising faster than permitted by the economy’s fundamentals. What makes this trend alarming is that, in many respects, borrowing is used to compensate for lack of income growth.
Growth in annual real disposable income averaged less than 2% since the early 1990s – one-third of the pace seen in the 1970s and 40 per cent slower than the average income growth of the 1980s. Despite a record-high employment rate, wage gains are non-existent, with real wages virtually flat since the beginning of the decade. Not only are wages not rising, but the absolute pay of many of the new jobs created in the past decade is lower.
“The almost chronic inability of the Canadian economy to generate high-paying jobs is largely behind the structural slowing in income growth, which, we believe, is at the heart of the excess borrowing by households,” says Tal. Many Canadians point to globalisation and heavy foreign ownership as reasons that there are fewer high paying jobs in Canada.
A copy of CIBC World Markets’ Consumer Watch is available at www.cibcwm.com/research
@ January 20, 2005