Consumer spending will continue to cool

While Canadian households may be setting new highs in debt-to-income ratios, the country’s corporations, governments and citizens are in a much stronger position to handle that risk, a new report from the Bank of Nova Scotia said Thursday.

Warren Jestin, chief economist with Scotia Capital, said Canadians have learned their lessons from a painful deleveraging process in the early ’90s when corporate, household and government balance sheets were all weak and monetary policy was very restrictive.

“Canadians are very cognizant of the dangers of excessive debt leverage. We’ve been there before and know what it takes to come back from the brink,” he said in the report.

Looking ahead, with homeownership already at record levels of 70%, Mr. Jestin expects Canadians to concentrate on saving more of their incomes while governments focus on climbing out of deficits. As a result, the Canadian economy will see slower growth, fuelled more by business investment and exports.

While the Bank of Canada slowly began raising interest rates earlier this year the borrowing environment remains quite friendly, helped along by a solid rebound in hiring and strong housing market.

“Even with the continuation of low borrowing costs, however, existing debt burdens point to a cooling of consumer spending and housing activity in the year ahead,” Mr. Jestin said. “Reduced employment gains will likely add to consumer caution. While consumers can no longer be counted on to lead domestic growth, our analysis suggests that the odds that current household debt leverage will trigger a full-blown relapse are relatively low.”

At the moment though, debt-to-income ratios are sitting at a record 146% and appear poised to move higher.

In its own report published last month, Toronto-Dominion Bank’s chief economist Craig Alexander warned the ratio was likely headed north of 150% with interest rates remaining low, and urged the government and the Bank of Canada to step in.

However Mr. Jestin said the rising trend in borrowing is not new, and that the ratio has been rising since the ’80s fueled by a stable inflation and interest rate environment, as well as the rise in more flexible financial products to help manage household finances.

“Rising debt levels also reflect increasing homeownership,” he said. “The relative increase in Canada’s debt-to-asset ratio over the past decade has been much more modest than in the U.S., the U.K. and Australia in large part because the increase in debt has been backed by rising assets, including real estate.”

Source: Financial Post