Early signs of stress for household finances: CIBC

Consumer spending has been a key pillar in the economy’s surprising strength this year, but fractures in household finances are starting to reveal themselves, says CIBC World Markets Inc.

In a new report, the bank’s economists noted that stronger-than-expected consumer spending pushed the Bank of Canada to boost its GDP forecasts this year, and helped convince the central bank to start raising interest rates once again in June.

“However, cracks are starting to show, with the recovery in services consumption stalling at a level still below its pre-pandemic trend, and households starting to fall behind on some of their debt repayments,” it said.

Among the early signs that higher interest rates are starting to stress household finances, the report noted that the number of consumer debt restructuring proposals has surpassed its pre-pandemic level. Additionally, the share of non-mortgage loans that have fallen into arrears has risen. For most of these kinds of loans, the share of borrowers falling behind has surpassed pre-pandemic levels too.

And while consumer bankruptcies remain historically low, many household mortgages haven’t been reset to reflect the higher-rate environment yet.

“The biggest test for mortgage renewals will come in 2025 and 2026, when many of the mortgages taken out during the pandemic are up for renewal,” the report said. “That doesn’t mean that the remainder of 2023 and 2024 won’t bring difficult decisions for some households.”

It noted that about a third of mortgages will have to be refinanced between mid-2023 and the end of 2024.

“Defaults are unlikely to soar given that the vast majority of these mortgages will be on units that are worth more than when purchased, so the sale of the property is still an exit strategy. But it will act to further restrict the amount of disposable income that households have to make other purchases,” it said.

As a result, consumer spending is expected to see little growth in the months ahead, “resulting in a close brush with recession,” the report said.

“That will open up some additional slack within the economy, seeing inflation ease further next year and allowing interest rate cuts to start before the middle of 2024,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.