The recent yield curve inversion has renewed speculation about a potential North American recession and prompted questions about how a contraction would affect households.
Though it’s impossible to say for certain when, or even if, such an event will occur, several indicators suggest the pain would be more severe on the Canadian side of the border than in the US.
Eric Lascelles, chief economist at RBC Global Asset Management Inc., which oversees C$430 billion ($324 billion), says while he doesn’t see signs of a debt crisis in the making, Canada’s households are clearly more stretched in terms of debt and spending than their American counterparts.
“There’s just no latent capacity to spend or to buffer a shock in Canada, and the US is very well positioned,” Lascelles said by phone from Toronto. “You could lose your job and you would be okay in the US, or rates could go up and you’d be fine, or the economy could turn down and spending could continue. In Canada, you can’t really say that.’’
There are indicators that show why financial strains are higher in Canada — and one that shows why the country’s vulnerability to a shock may actually be receding. Canada’s household savings rate fell to 1.1 percent in the first quarter. “That’s about as low as it gets, historically,” said Lascelles. It compares with 6.7 percent in the US. The disparity between the two rates hasn’t been this wide since the 1970s.
The lower the savings rate, the less of a cushion households will have to weather tough economic times.
“If there were to be a recession, whether it’s in 2019 or 2029, or sometime in between, you can imagine Canadians getting hit a little harder than Americans,” Lascelles said in a separate webcast. “They just have less room for error, less room to cushion any kind of hit with spending, before they would actually fall into outright dissavings.”
Canada’s ratio of debt to income reached 176 percent in the fourth quarter, among the highest in the developed world. That compares with a US rate of 133 percent. Canada’s households are “substantially more leveraged” than those in the US, Lascelles said. In Canada, the debt service ratio — the amount of disposable income that goes to paying interest and principal on debt — climbed to 14.9 percent in the fourth quarter, the highest since 2007. “It’s about as much money as people have spent servicing debt, on an interest plus a principal basis, since records began in 1990,” Lascelles said. “That’s a concern.”
Canada unemployment rate falls to lowest since 1976
Canada’s labour market continued its strong run of job gains, bringing the unemployment rate down to a fresh low and adding to evidence the country is emerging from a recent slowdown.
The economy added 27,700 in May, Statistics Canada said in Ottawa, bringing the gain over the past 12 months to 453,100. The unemployment rate fell to 5.4 percent, the lowest in data going back to 1976.
The report reaffirms the labour market as the main driver of Canada’s expansion, and adds to a recent run of data showing clear signs the country is on the path back to growth after stalling at the end of
last year. The currency jumped on the report, which is seen to give the central bank more ammunition to resist pressure to lower
The Canadian jobs report contrasts with weaker-than-expected payroll data in the US that’s fuelling concern of a broader slowdown there and boosting calls for a Federal Reserve interest-rate cut.