With many commentators and analysts calling for a recession, possibly in the next 12 months, driven by a US downturn, Canadian households may be hit harder than those south of the border.
Several factors are behind this opinion, expressed by Eric Lascelles, chief economist at RBC Global Asset Management.
He told Bloomberg that he doesn’t see signs of an incoming debt crisis but warned that Canadian households are less prepared for recession than their US peers.
With a savings rate of just 1,1% in the first quarter of 2019, Canadian households have a far smaller buffer than the 6.7% savings rate of US households.
That means those that lose their jobs in a recession may quickly struggle to keep on top of household expenses and debt servicing.
The ratio of debt to income in Canada hit 176% in Q1 2019, far higher than the 133% of American households; while Canadians’ debt service ratio was 14.9% in the fourth quarter of 2018.
“It’s about as much money as people have spent servicing debt, on an interest plus a principal basis, since records began in 1990,” Lascelles said. “That’s a concern.”
On the plus side
There are some good points in Canadian households’ favour though.
Although they are heavily leveraged, Lascelles says that the Bank of International Settlement metric of how fast credit is rising compared to normal, indicates that most of Canadian household’s debt was acquired some time ago rather than a recent spike.
That means that if there was a crisis – including a housing market crash (which Lascelles is not expecting) – a smaller share of households would have new debt without a build-up of equity which would make them vulnerable.
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