Canada shows the lowest household debt ratio in 10 years, but is it for long?

During the first half of 2020, the situation with the national household indebtedness has improved due to government’s support measures.

According to Statistics Canada, the household credit market debt was down from 175.4% to 158.2% in Q2. The main reason for that is an 11% hike in household disposable income, while the stock of credit market debt was almost unchanged.

Government supportive transfers amid COVID-19 pandemic and mortgage deferral programs combined with historically low interest rates have provided financial help to many Canadians, especially those who lost work during the business shutdowns.

Nevertheless, economists believe it’s not for long.

“We’ll heading towards more challenging times,” – Ksenia Bushmeneva, an economist at Toronto-Dominion Bank, noted. “The support measures will be eventually eliminated, and the state of the labor market and consumer finances cannot diverge indefinitely.”

The main issue is that we won’t see a full economic recovery any time soon, and the government is already winding down support measures. It means some households will face hard times making their payments. In Bushmeneva’s opinion, delinquencies and consumer insolvencies will start growing at the end of 2020 and into 2021.

However, today, the government income support is helping the economy to get out of the deepest downturn in history and allowing Canadians to pay their debts, raising their savings.

In Q2, the household debt-service ratio was down from 14.5% to 12.4%, marking the largest drop in history.