Growing Concerns About “Monster” Consumer Debt Bubble In Canada

Economist says there’s not much the Bank of Canada can do about it.

Canadian economist David Rosenberg says Canada’s consumer debt bubble reminds him “of Mary Shelley’s Frankstein,” saying “We built the monster and then ‘oops.”

As noted by BNN Bloomberg, “Canadians owe, on average, about $1.70 for every dollar of disposable income. Canada’s ultra-low interest rates have made the creation of that debt bubble inevitable, said Rosenberg.”

The report also noted a speech by Bank of Canada Governor Stephen Poloz, who said that eight percent of Canadian households have a debt burden that is over 350% of their annual income.

That is where a crisis could begin, as even a small rise in interest rates will swamp many of those deeply-indebted Canadians.

Rosenberg noted that a one percent rise in mortgage rates (47% of all Canadian mortgages are in a renewal phase in 2019) would be like “a one per cent pay cut for the Canadian economy.”

He also pointed out that the Bank of Canada has limited control in this case:

“The Bank of Canada is just the little boy with a finger in the dike basically. Interest rates are gravitating higher in Canada because it’s happening in the United States. There is nothing the Bank of Canada can do about that.”

Of course, if the Bank of Canada had stuck to its core mandate of being a prime source of lending to strengthen Canada (Pierre Trudeau shifted things towards international banks), Canada would be in a far better position to deal with these challenges.

Tax cuts could help counter rising interest rates

There is a simple way to counter-act some of the challenges that will be faced by indebted Canadians amid rising interest rates. As I’ve said before, repealing the carbon tax and cutting taxes for individuals and families would free up some financial room that could go towards debt-repayment and interest costs.

However, with the Trudeau government going in the opposite direction, Canadian consumers are getting slammed by both higher taxes and higher interest costs. And all of that is happening as investment flees the country, and an economic slowdown looms. If government policy and interest rates keep hitting consumers at the same time, it makes an economic crisis more likely.

Spencer Fernando