It was just last month when we profiled Canada’s “other problem”: record high household debt.
Canada is struggling to cope with falling crude prices which have put enormous amounts of pressure on some parts of the country, most notably Alberta, where suicide rates are on the rise, as is property crime and foodbank usage.
Amid the malaise, households are also being pressured by persistent CAD weakness - which is of course a symptom of falling crude. The currency’s decline has driven up prices for things like fresh fruits and vegetables, 75% of which Canada imports. That puts an extra burden on households that are already laboring under record debt.
As we showed three weeks ago, household debt relative to disposable income is sitting at 171% in Canada meaning that for every $100 in disposable income, households have debt obligations of $171. That’s the highest figure for any G7 country.
That’s disconcerting for any number of reasons. As we wrote, “this would be bad enough in a favorable economic environment with a benign outlook for rates, but it's a veritable nightmare when the economy is sliding headlong into recession and central planners are hell bent on trying to normalize policy some time in the next five or so years.”
In other words, the outlook for Canada’s economy isn’t good, and that means joblessness is likely to rise going forward...
But interest rates have virtually nowhere to go but up - at least in the medium to long-term. Sure Stephen Poloz may cut rates one or two more times to try and help the oil patch avert certain insolvency, but at 50 bps, there's only so much lower Canada can go unless the BoC intends to experiment with NIRP.
This means that households could face the disastrous prospect of rising rates in an unfavorable economic environment. Think a monetary policy mistake like hiking into a recession can't happen? Just look at what the Fed did in December. Throw in the fact that many families are overburdened thanks to the astronomical cost of housing in places like Vancouver and Toronto and one is inclined to think that some Canadian households may find themselves in quite a bit of trouble going forward.
But don't take our word for it, just ask Canadians, half of whom said in response to a new Ipsos Reid survey that they are within $200 per month of not being able to pay their bills and make their debt payments.
"Ipsos Reid conducted the poll about a week after the Parliamentary Budget Office issued a report on Jan. 19 that said Canada has seen the largest increase in household debt relative to income of any G7 country since 2000," The Calgary Herald writes, adding that "31 per cent of respondents said any increase in interest rates could move them towards bankruptcy".
The survey also found that 25% of Canadians are already unable to cover their bills and service their debt.
So what do you do if you're the BoC? Cut rates to boost the economy and rescue the oil patch at the risk of driving the cost of imported goods through the roof, thus pressuring consumer spending and thereby creating another headwind for the economy? Or hike to bolster the loonie at the risk of tanking not only the oil patch but also the 31% of the country that say they'll slip into bankruptcy it rates rise?
Your guess is as good as ours.