The economy made some improvements but is still overly debt-dependent. That’s what the latest household debt to GDP data from Statistics Canada (Stat Can) shows for Q1 2021. The ratio is significantly higher than a year ago, but that aside — it was high before the pandemic. Canadian households make Americans before the Great Recession look like Scrooge McDuck.
Household Debt To GDP
The household debt to GDP is the size of consumer credit as a percent of gross domestic product (GDP). Fast-rising ratios mean households are borrowing faster than GDP is increasing. Growth is essentially being fueled by the debt they are borrowing. Not exactly a long-term solution.
Fast falling ratios mean GDP is growing faster than debt. In this case, the economy is growing faster than the rate people need to borrow money to buy things. This is the sign of an actually booming economy, as opposed to a debt-driven boom. It’s pretty obvious which one is better, unless you’re lending people money.
Higher household debt to GDP ratios means sacrificing future economic growth. For every point this ratio gains, 0.3 points of long-term GDP growth are lost, according to the US Federal Reserve. After all, debt is borrowing future productivity for consumption today. It boosts near-term numbers, but in the long term makes things much worse. This leads to higher and higher debt loads required for future growth.
Canadian Household Debt Is Now 111% of GDP
Canada’s household debt to GDP is astronomical, but it did slip a little lower in this morning’s numbers. Household debt was 111.6% in Q1 2021, down 0.67% from the previous quarter. The ratio remains 7.98% higher than it was during the same quarter a year ago. It fell from the previous quarter, and should fall in the next quarter as well. This is not because borrowing is slowing. It’s due to the pandemic’s skew on the data, which shouldn’t be too surprising.
Canadian Household Debt To GDPCanadian household debt expressed as a percent of gross domestic product. Source: Stat Can; Better Dwelling.
Obviously a lot of wonky numbers throughout the pandemic, so let’s start with the bump in Q2 2020. It was the first full pandemic quarter, and the ratio climbed very quickly. This isn’t because debt loads increased, but it was because GDP fell abruptly.
The pandemic’s impact on GDP shouldn’t be read like a regular GDP drop. Usually, it drops because of restraints to unstable economic growth. Artificial restrictions on commerce are the biggest reason GDP fell. Not being able to spend money because you have none, and not being able to spend because the store is closed, is very different. As health restrictions are lifted, GDP should rise, pushing this ratio lower.
Even Adjusting For The Pandemic Data Skew, It’s Still Very High
Don’t let that fool you into thinking the ratio is only high due to pandemic-related data skews. Even before the pandemic, the ratio was at 103.3% in Q1 2020, which is about 30 points higher than healthy. Even the US at the peak of their housing bubble in 2008 “only” reached 99.8%, and Canada was above that before the pandemic.
Canada’s household debt to GDP ratio will fall over the next few months, but it’s not how it seems. Record home sales are pushing debt levels higher, even as the pandemic rages on. Over the next few quarters, we’ll see this number fall. Even if it stabilizes at 2019 levels though, it’s still a big problem for the future economy.
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