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5 Factors Threatening the Canadian Economy: Household Debt

26 June 2013

So far in our mini-series focusing on the biggest threats to the Canadian economy we’ve looked at oil prices and the housing market. Today we’ll look at one of the most hotly debated topics of them all – household debt.

Household debt is definitely one of the biggest threats to the Canadian economy. It’s the reason Finance Minister Jim Flaherty has changed the rules to mortgage lending four times in just as many years. At our worst, our debt-to-income ratio hit 165 per cent at the end of last year – meaning that for every dollar we spent, we owed $1.65 per household, on average. This is the threat that many believe will be our doom, and the boat that will finally sink us, and it’s not hard to see why. Just before the economy in the States collapsed, household debt was at an all-time high and people simply couldn’t afford to pay their bills.

So how big is this threat to Canada? And could it really put us into a recession?

Excessive numbers of household debt can pull any country into a recession, but the chances are not good that it will happen here.

One reason for that is because, while our ratio is high, the government and the Canadian people are taking steps to reduce it. While it may have been hovering near the 165 percentage point, new statistics now show that we’re at about 161.77 per cent; and we may have never been as bad off as we thought we were anyway.

In 2012 we went off stats that showed our household debt ratio to be between 150 and 155 per cent. But then Statistics Canada revised the number, included some that had been left out previously, and then released that 165 percentage which sent everyone into a full-on panic. Now, the agency has once again re-worked the stats, and it seems we were never that bad off anyway.

The new figures released by the agency show that household debt was actually lower, and personal disposable income higher, than what was originally thought. Now the agency shows that household debt hit only 162.62 per cent in the last quarter of 2012. Still a big one yes, but not nearly the catastrophe we thought we were headed for. And the fact that we’re working to bring this down shows that Canadians aren’t kidding themselves about the size of this potential threat.

Household debt is always a threat to any economy – no matter what their debt ratio or other data shows. It’s one of those areas that is mostly dependent on people and how they want to spend their money. Governments need to step in sometimes to ensure that we’re not getting in over our heads, and perhaps that’s one reason for the slowdown in this type of debt that we’ve seen.

But we’ve seen what happens when we’re not careful with our household budget, and it seems the Canadian people are also working to ensure that this is one threat that never comes to fruition.

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