Canadian consumer debt levels

(January 20, 2005) The continuing low interest rate environment has sparked increased borrowing among Canadian consumers, who are now 7% more in debt than they were last year, according to a new report from CIBC World Markets.

CIBC economist Benjamin Tal says that while apocalyptic scenarios about the possible collapse of the credit market may be exaggerated, Canadians do appear to have a complacent, and potentially dangerous, attitude towards borrowing.

“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 Tal in his report: “Are We Sitting On A Debt Time Bomb.”

“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,” he adds. Increased reliance on debt does not come without a cost, Tal warns, such as a sudden rise in interest rates, an economic slowdown or even a jump in the value of the loonie. “Heavy borrowing today means reduced economic flexibility tomorrow.”

Tal notes that during the first three quarters of 2004, personal disposable income grew 3% while households increased borrowing by 7.5%. That’s not a new trend — household debt has outpaced income growth by an average of three percentage points since 1989.

“What makes this trend alarming is that in many respects, borrowing is used to compensate for lack of income growth,” Tal notes. “There is little doubt that income in Canada is not rising as fast as it should be,” he adds, pointing out that despite healthy employment rates, real wage gains have been virtually non-existent since the early 1990s.

Tal blames the “almost chronic inability” of the Canadian economy to generate high-paying jobs as the reason behind the slowing of income growth, “which we believe is at the heart of the excess borrowing by households.”

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com