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2180 Steeles Avenue West,
Suite 204, Concord,
ON, L4K 2Z5

Phone:     905-761-7001
Toll Free: 1855-761-7001
Fax:          905-761-7005

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11 June 2019

Canadians may feel more pain from the next recession than Americans

The latest shift in the yield curve led to more discussions about a possible North American recession and caused questions about how it could influence households.

Although no one can predict for sure when it may happen or if it can happen at all, certain factors suggest that Canada will feel a harder hit from it than the U.S.

According to Eric Lascelles, chief economist at RBC Global Asset Management Inc., which oversees C$430 billion, though there are no signs of a debt crisis in the nearest future, the Canadian households are definitely more tensed in terms of debt and spending than the Americans.

“Canada doesn’t have a necessary hidden capacity to spend or to provide a buffer in case of a shock, unlike the U.S.”, - he noted. “You can lose your job and you will still be fine in the U.S., interest rates may rise and you’ll be fine, the economy may start slowing, but the spending will go on. You can’t say the same for Canada”.

There are three factors showing why Canada is more vulnerable financially, and one proving this exposure is decreasing.

Household Savings Rate

In the first quarter of 2019, Canada’s household savings rate went down to 1.1% and reached the lowest level in history. Meanwhile, the U.S. shows 6.7%. We haven’t seen such a gap since the 1970s. The lower the savings rate, the smaller a cushion for households to cope with difficult economic times.

Debt-to-Income Ratio

In the fourth quarter of 2018, Canada’s ratio of debt to income rose to 176%, which is one of the highest results in the developed world. In case of the U.S., the number reached 133%. It means Canada’s households are much more leveraged than those in the U.S., Lascelles noted.

Debt Service Ratio

In Q4, Canada’s debt service ratio (the share of disposable income necessary for paying interest and principal on debt) rose to 14.9%, marking the largest number since 2007. “It’s the largest sum, people have spent servicing debt, since the records began in 1990,” - Lascelles said. “It’s definitely a point of concern.”

As the countries measure the DSR in different ways, it’s hard to provide an accurate comparison to the U.S. However, the Bank for International Settlements, which applies one methodology for all countries, says the debt service ratio was 13.3% in Canada and 7.9% in the U.S. It’s another sign that Americans have more space to withstand a possible economic conditions deterioration.

 

 

 

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