High Personal Debt Levels Are One Risk to Economic Recovery
What impact will personal debt have on the economic recovery that is now underway? It is just one factor among many, but high indebtedness will contribute to the slower-than-average economic growth expected in Canada over 2010 and 2011.
A new report from TD Bank Financial Group outlines some of the risks the Canadian and global economies will face over the next couple of years. The report points to several overlapping issues that will combine to create challenges for advanced and emerging economies.
The Risks in the Recovery
One of the main issues is the stimulus spending that was used in countries around the world to address the recent recession.
The stimulus helped immensely, but it has left a rather big hole for some countries to crawl out of. Not only will the impact of the stimulus dollars begin to diminish as the funding comes to an end, many countries – including the United States, Japan and several European nations – will have huge fiscal deficits.
When the stimulus taps turn off, sometime in 2011, these countries will notice a drag on their economies even before they start tackling their deficits.
In emerging markets, the risk is inflation. As the TD report notes “non-Japan Asia” and Latin America countries were not affected as directly by the recession. Their economic slowdown was driven more by exposure through trade and finance to countries that were hit hard by the financial crisis. These emerging markets must reduce stimulus and “lean against the rate of economic expansion” to avoid inflation or excesses in asset prices.
Impact for Canadian Consumers and Homeowners
Both Canada and the U.S. are expected to enjoy 3% growth in 2010 and 2011. While not bad, that rate is slower than in the past. Slower U.S. growth and a strong Canadian dollar will mean less demand for Canadian exports. There could also be a slowdown in the economy as people struggling with debt begin to cut spending.
As stimulus spending comes to an end, governments will need to balance the books. That means higher taxes. Interest rates will also rise.
Because Canadians are holding more debt than at any time in history, any rise in interest rates will be felt. For those living close to the edge, the impact of higher interest rates and taxes could be especially severe.
One way to get a handle on debt is with a mortgage refinance. Using the funds from your refinance, you can consolidate your debts and pay off all of your high-interest loans. But you need to act soon. As of April 19, 2010, the federal government will reduce the amount of money available through a refinance from 95% to 90% of a home’s value. Interest rates are widely expected to inch up in the summer, and the housing market is expected to cool off in the second half of the year. If you need to tap into your home equity, now is definitely the best time.
To discuss your mortgage refinance options, contact a CMI mortgage broker today.
