The biggest domestic risk to the Canadian economy just got a little riskier. Statistics Canada figures for the second quarter show that the rate of household debt to disposable income has climbed to just shy of 168%, up by a little more than 1% from Q1 (Q1 – 166.6% Q2 – 167.8%).
The Q2 growth reverses a slight drop in Q1. The increase was accompanied by a decline in Canadians’ per capita net worth, which dipped by about $1,300. Debt growth is also out pacing wage growth. Household debt climbed 1.9% while wages rose just 1.2%. The Q2 report does not take into account the Bank of Canada interest rate increases in July and September.
Connected to the household numbers is a national statistic that is watched closely by the global financial community – the, so-called, credit-to-GDP-gap. This number has the Bank for International Settlements waving a big, red flag over the Canadian economy.
The BIS is made up of the world’s central banks and the credit-to-GDP-gap is the difference between the credit-to-GDP ratio and the long-term averages in a particular country. It includes household debt along with other loans and fixed-income securities. In Canada the gap is currently 11.3 percentage points above the long-term average. That is down from 14.1, but anything more than 10 percentage points creates concerns. Canada is in league with China and Hong Kong.
Moody’s Analytics is also waving a red flag, saying that borrowing for homes has put the economy in a precarious position. Moody’s concerns focus on the fact that the federal government backs the vast majority of mortgage insurance and could, theoretically, be on the hook for a $500 billion bail-out if the housing market crashed and CMHC suffered a total loss.
A complete collapse is, of course, far-fetched. Moody’s own outlook shows the market cooling over the next year. It further softens the apocalyptic view by saying the Canadian economy is robust enough to manage such a catastrophe.