The Canadian economy is among the countries most exposed to a major risk of household debt reduction because of potential changes to tax regimes that could bite into investment volume, coupled with relatively sluggish housing markets.
According to Morgan Stanley’s Household Deleveraging Risk Indicator, other significant contributors to the Canadian situation are weaker credit growth, declining home prices, and rising interest rates.
Other developed countries facing similar predicaments are Sweden and Norway. Australia was rated by the multinational investment bank as the economy most at risk due to these trends.
Read more: Two-fifths of Canadians rue their debt loads
“These economies now face a crucial juncture as housing markets weaken, forcing a reappraisal of leverage and wealth, and global financial conditions tighten, increasing the consumption drag from debt service and rising savings,” Morgan Stanley strategists warned, as quoted by Bloomberg.
The bank’s report noted that household debt in the 10 largest developed economies now represents approximately 160% of income, a dramatic upsurge form the 98% over the past 20 years or so.
“The increasingly proactive use of macroprudential tools and greater inflation-target flexibility in some countries will lead to more gradual rate-hiking cycles, with lower neutral rates in the medium term,” Morgan Stanley stated.