Recession Talk Heats Up as Canadian Household Debt Levels Become Unmanageable

Is the Canadian Economy on the Verge of a Recession?

Talk of a recession seems a little premature. Yes, the current bull market is the longest on record and is due for a correction, but the economic data coming out of the U.S. is solid, although it’s beginning to show signs of weakness. And since the Canadian economy and U.S. economy tend to track each other somewhat closely, why would there be predictions of a Canadian recession? It’s all about personal debt loads. Because Canadians are drowning in debt, consumer spending will dwindle which will result in significantly weaker growth on Bay Street.

How In Debt Are Canadians?

The health of the Canadian economy can be measured by the health of the consumer. That’s because approximately 60% of Canadian gross domestic product (GDP) is fuelled by consumer spending. A little less than two-thirds of Canada’s GDP comes from consumer spending. If the Canadian consumer is doing well, the economy will follow suit. If the consumer spending falls though, it’s bad news for the Canadian economy and Bay Street.

Right now, it’s bad news, with spending outpacing wage growth. According to a recent survey, half of Canadians are taking on debt just to cover their living expenses. A full 47% of Canadians said they wouldn’t be able to cover their basic living expenses over the next 12 months without taking on even more debt. That’s not a lot of wiggle-room to cover an unexpected expense, like a car repair or job loss.¹

A slightly higher 48% said they have less than $200 at the end of every month, after covering living expenses and paying down debt. It’s getting worse too; last June, that number stood at 44%. As a result, disposable income is falling, with average monthly disposable income down $142 year-over-year to $557. When it comes to fuelling the Canadian economy, that’s not a lot of money.

Will Canada’s Growing Debt Load Impact the Bank of Canada?

Right now, interest rates are near record lows, which is providing Canadian consumers with a little optimism. They may get an additional break too. Many analysts expect the Bank of Canada to hold its key lending rate when it meets next in late October. It could be a different story in December and in 2020.

Household debt is still, according to the Bank of Canada’s Deputy Governor Lawrence Schembri, “the main risk to Canadian financial stability.”²

During the Great Recession, central banks around the world lowered their interest rates to help juice the economy. Today, after a decade of artificially low interest rates and a slowing global economy, low interest rates no longer have the same impact. Instead of helping fuel economic growth, lowering interest rates is just keeping economics afloat.

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Canadian consumers are saddles with debt and the Canadian economy is at a tipping point. This suggests the Canadian economy is headed toward a recession, which means investors should prepare their investing portfolio to deal with a bear market. That’s where Learn-To-Trade.com comes in.

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Sources:

1. “Nearly Half of Canadians (48%) Are $200 or Less Away from Financial Insolvency,” MNP Ltd., October 27, 2019; https://www.ipsos.com/en-ca/news-polls/Canadians-and-Bankruptcy-Oct-2019.
2. “Economic Progress Report: Inflation in Canada—Well Behaved and Well Controlled,” Bank of Canada, September 5, 2019; https://www.bankofcanada.ca/2019/09/economic-progress-report-inflation-canada/.

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