Forbes Magazine has a new study and the numbers look grim for Canada….it found that Canada is among seven countries that are “most vulnerable to a debt crisis” within the next three years.
Forbes is not the only one either….as a growing list of institutions say Canada has borrowed too much and things will backfire. But the debt problem Forbes and others see has more to do with BIG mortgages and ever-longer car loans than it does with any deficit the Liberal government is planning to run.
Spending in Canada has been growing — faster than the economy as a whole says the article. That means Canada is borrowing more and more money to keep spending growth going. And eventually, as happened in the U.S. in the financial crisis, people simply can’t or won’t borrow more.
Overall Canada is in sixth place, ahead of Norway, another country affected by the oil price slowdown. First place on the list belongs to China, followed by Australia in second place. Like Canada, Australia is a commodities-driven economy that made it through the financial crash but now has since seen house prices skyrocket.
To estimate debt crisis risk, the writers of the article looked at credit data from the Bank for International Settlements (BIS), a sort of “central bank of central banks” headquartered in Switzerland. It is interesting to note that the BIS itself has been warning of a debt and banking crisis in Canada. In a 2014 report, it said Canada’s economy was flashing “early warning indicators” of a debt shock, and estimated borrowing in Canada is growing 5.6 per cent faster than it should be.
Since that report, household debt in Canada has continued to go up, reaching a record $1.65 for every dollar of disposable income at the end of last year, Statistics Canada reports.
While the article talks about the debt crisis unfolding over the next one to three years, the federal government’s Parliamentary Budget Office says it will be more like 2020. In a report earlier this year, it said it expects interest rates to have risen by then, making debt payments more expensive for consumers and reducing new borrowing.
“Household debt-servicing capacity will become stretched further as interest rates rise to ‘normal’ levels over the next five years,” the report said.
The percentage of income Canadians spend covering debts will rise to 15.9 per cent by 2020, the PBO forecasts, from 14.1 per cent today. This means the average household will experience debt like we have never seen before.
What do you think? Are people in over their heads or is this financial talk just a bunch of scare tactic baloney?
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