Canadian Household Debt Headed For Worrying New Records, Banks Warn

Canadian consumer debt was already near record levels before COVID-19 hit, but the economic shock from the shutdowns will push it to its highest levels ever, a new TD Bank report says.

The warning came the same day as the Bank of Canada’s latest financial system review, which said the longer the pandemic’s economic shock lasts, the higher the risk that Canadian households will become insolvent. 

Watch: Keep accepting cash, Bank of Canada urges retailers. Story continues below.

Canadians will pull back on new borrowing this year, putting the retail economy at risk, TD Bank economist Ksenia Bushmeneva predicted in a report issued Thursday.

But many households are seeing shrinking incomes, even as their debt levels remain the same, or grow. Household debt, as a share of income, will rise to an all time high of $1.85 in debt for every dollar of disposable income. Its previous high was around $1.78.

That debt will come down quickly as Canadians pull back on spending, Bushmeneva predicted, but it will still remain above last year’s already elevated levels for some time.

“We expect it will take until at least the second half of 2021 for the unemployment rate to return to its pre-crisis level, suggesting that the economic pain will linger for some time to come,” she wrote.

In its review, the Bank of Canada raised concerns that household debt levels are likely to rise and become acute for those whose incomes don’t fully recover from the pandemic.

“We entered this global health crisis with a strong economy and resilient financial system. This will support the recovery,” bank governor Stephen Poloz is quoted as saying in the review.

“But we know that debt levels are going to rise, so the right combination of economic policies will be important too.”

The Bank also said there are signs in the country’s financial markets that suggest concern about the ability of companies to weather the COVID-19 economic crisis.

The central bank has spent the last two months making a flurry of policy decisions that has seen it slash its target interest rate and embark on an unprecedented bond-buying program to ease the flow of credit.

The report suggests these measures have helped ease liquidity strains and provide easy access to short-term credit for companies and households.

But it warned Thursday morning that a cash-flow problem for businesses seeing sharp revenue declines during the crisis could soon develop into a solvency issue.

Market prices point to a concern that business defaults are likely to rise, the review said.

Emergency measures

Aside from what is now approaching $150 billion in direct federal aid, the central bank over the course of March alone slashed its target interest rate to 0.25 per cent from 1.75 per cent.

It has also snapped up federal bonds to effectively provide low-cost financing to Ottawa to cover a massive spike in spending.

But the longer the economic shock from COVID-19 lasts, the more it drives up the risks of consumer insolvencies, the central bank says.

The number of vulnerable households those putting more than 40 per cent of their income to cover debt payments “is likely to rise,” the bank says, and fall behind on loan payments even with deferrals to some 700,000 households so far.

A temporary hit to wealth

TD’s Bushmeneva also predicted Canadian consumers’ wealth would take a short-term hit from the crisis.

“Given the drop in equity prices in the first quarter and the collapse of oil prices, household wealth contracted sharply in the first quarter of this year. In addition to this, the deferral of mortgage payments and lower home prices will also weigh on wealth in the first half of the year,” she wrote.

Because mortgage deferrals slow down the rate at which people accumulate wealth, Bushmeneva estimates Canada’s wealth fell $300 million behind as a result in the first quarter. For the same reason, Canadians will miss out on another $1.2 billion in wealth in the second quarter of this year, Bushmeneva wrote.

HuffPost Canada with a file from The Canadian Press