Editorial Cartoon by Graeme MacKay, The Hamilton Spectator – Thursday December 15, 2022
Household debt levels could cripple economy, economist warns
Canadian household debt levels have increased enough to spark a recession when combined with interest rate hikes, says one economist, after Statistics Canada released its latest report Monday.
Jim Stanford, the director of the Centre for Future Work, said the debt levels are high enough that, as interest rates rise, disposable income ordinarily spent on consumer goods is being used to pay debt.
“Chances are you’re going to see an increased interest bite from household budgets equal to about two or three per cent of GDP,” he said. “That alone is enough to put the economy into a recession, let alone the other impacts on business investment, for example.”
The standard definition of a recession is when the country’s gross domestic product (GDP) contracts for at least two quarters.
Household consumption accounts for more than 50 per cent of Canada’s GDP, Stanford said, making it the biggest single contributor to economic growth.
Stanford said $16 billion in additional interest payments made over three months is worth more than half of a percentage point of Canada’s GDP.
Statistics Canada’s new figures show for every dollar of disposable income in the third quarter of 2022 there was $1.83 in credit market debt. The figure is a slight increase from the previous quarter and up from $1.77 last year.
The figures come as the Bank of Canada has continued to raise its key policy rate. Last week it hiked the key policy rate another 50 basis points to 4.25 per cent in an effort to fight inflation.
Mortgage payments also hit Canadians hard with interest payments expanding by more than 16 per cent, which is the largest increase on record, according to the StatsCan report.
“It’s certainly hard evidence that the rising interest rates are wreaking havoc with household finances,” Stanford said. “We’ve never seen an interest shock like that to Canadian households before.”
He said he expects the situation to worsen in the coming months.
On Monday, Bank of Canada governor Tiff Macklem defended the interest rate hikes in Vancouver in front of the Business Council of British Columbia. He said they are working and the country needs to stay the course.
“If we under-tighten, inflation is going to stay too high. Canadians are going to have to continue to endure the hardship of higher inflation,” Macklem said.
He said the bank was surprised at how international events, like the Russian invasion of Ukraine and supply chain issues powered inflation.
He said such trends will make it more difficult to bring inflation down than it has been in the past. (The Toronto Star) From sketch to finish, see the current way Graeme completes an editorial cartoon using an iPencil, the Procreate app, and a couple of cheats on an iPad Pro … These sped up clips are posted to encourage others to be creative, to take advantage of the technology many of us already have and to use it to produce satire. Comfort the afflicted. Afflict the comforted.