The Canadian economy is worsening on several fronts. The growth is slowing down. Jobs disappear in the labor market. And inflation is way too high. In turn, a growing number of domestic banks expect Canada to plunge into recession next year.
The mood soured on Wednesday as the US Federal Reserve forecast that much higher interest rates would be needed to quell inflation. The central bank also forecast that US economic growth would slow to a meager 0.2 percent this year — unwelcome news for Canada’s largest trading partner.
How vulnerable are Canadians to a recession? So far, the average household seems to be doing just fine. But no doubt the risks are increasing. And the longer it takes to contain inflation, the more collateral damage can spread through the economy.
Here are eight stats to watch for signs of distress.
Canadians are experiencing a wealth shock. Their collective net worth — that is, total assets minus liabilities — fell nearly $1 trillion in the second quarter of this year, down 6.1 percent from the first quarter, the largest drop ever. The upside: Households remain a lot wealthier (about $3 trillion) than they were before the pandemic. Mind you, the adjustment is not over yet. House prices continue to fall in the third quarter as rising interest rates cool the real estate market, where Canadians get most of their wealth. That could force people to think twice before making major purchases. “Higher interest rates will make households look and feel less wealthy, and will also increasingly reduce purchasing power,” Claire Fan, an economist at the Royal Bank of Canada, wrote in a recent report.
Canadians have been saddled with debt by the pandemic. They now owe about $2.8 trillion, up 16 percent from the end of 2019. As interest rates rise, households spend a larger portion of their budget on repayment. In the second quarter, the debt service ratio — the total obligatory principal and interest payments, as a percentage of disposable income — was 13.6 percent. That’s lower than before the pandemic — but maybe not for long. Toronto-Dominion Bank economist Ksenia Bushmeneva expects the debt service ratio to hit a new record early next year. She calculated that for the average borrower, the cost of paying off debt could increase by $2,500 per year by the end of 2023, compared to early 2022. Even if Canadians can afford those higher payments, it could crowd out other purchases.
Canadians like to use their homes as piggy banks. Specifically, they take out loans secured against their homes, known as equity lines of credit. The amount owed on HELOCs continues to grow. As of the fiscal third quarter ended July 31, Canada’s Big Six banks reported domestic HELOC balances totaling $265 billion, up from $228 billion three years earlier. Interest payments are tied to a bank’s prime rate, which has risen significantly as the Bank of Canada raises its policy rate. The three percentage point increase in the prime rate since March 1 means that HELOC interest-only payments have doubled, from about $246 per month to $496 per month, per $100,000 borrowed.
Insolvencies typically rise in a recession. Not in the corona crisis. Governments supported personal incomes through pandemic stimulus programs, which contributed to lower insolvency rates (proposals and bankruptcies) and poverty. When those programs ended, consumer insolvencies began to mount again. But those levels remain modest, especially when measured against Canada’s burgeoning adult population. The percentage of defaults or payments that are more than 90 days past due are increasing for many types of loans, but are no worse than in prepandemic years. The numbers suggest Canadians are not in financial trouble — at least not yet.
The good news about inflation: In the United States and Canada, annual rates are falling. The bad: Other measures of consumer price growth are proving to be tacky. For example, US core inflation – excluding food and energy – accelerated in August. Canada saw a slight moderation in core inflation last month but did not come close to levels that will please the Bank of Canada. This increases the likelihood that major central banks will continue to raise interest rates to curb inflation. The Bank of Canada, for its part, does not see inflation returning to its 2 percent target until late 2024. along with price increases.
In general, Canadians tend to closely monitor inflation. Retail sales reached $63.1 billion in June, up 11 percent from a year earlier. After taking into account inflation, retail volumes increased by 1.9 percent. In other words: households spend more, but have yet to start buying fewer stuff. That could change soon. In a preliminary estimate, Statscan said retail sales fell 2 percent in July. Lower gas prices that month probably had an excessive effect. But analysts will look for signs that consumers are cutting back on purchases amid steep inflation and rising borrowing costs.
House prices have fallen in many markets since February. But with the rapid rise in mortgage rates, affordability is declining. This puts even more pressure on a rental housing market that is chronically undersupplied in major cities and absorbing record flows of new entrants. In turn, rents are rising just about everywhere. The average asking rate for all property types in Canada is up 11.1 percent from a year ago, according to data from Rentals.ca. For one-bedroom units, the increases are particularly sharp in London, Ontario. (36.9 percent), Calgary (29.8 percent) and Vancouver (18.8 percent). Of course, many tenants are subject to rent control laws that limit annual increases. But for those who move, the market is highly competitive and it is getting more expensive.
As the economy cools, so does the demand for labor. Job opportunities on Indeed Canada have weakened since May but remain significantly higher than before the pandemic. There are many signs of needing help, especially in sectors with crushing labor shortages, such as healthcare and hospitality. Nevertheless, the labor market is undergoing an adjustment. Canada has lost jobs for three straight months — which usually happens during a recession — and the unemployment rate has risen to 5.4 percent, not far from a record low. Time will tell whether the adjustment is short-lived or leads to widespread layoffs. In the United States, the situation is complicated. Despite heated debate over whether the US has entered a recession, employers have created more than 3.5 million jobs so far this year. And hiring binges isn’t exactly consistent with economic downturns.