Quote from Frostie:
Hey Kass can you comment on what Mark Carney said today about household debt in Canada?
http://www.nationalpost.com/news/ca...+debt+rates+continue+mount/3971673/story.html
I know its nothing new, but they have been reiterating this point for a few months. I wonder if there is some thing else underlying the issue?
Hey Frostie,
The rising debt levels of Canadians is indeed a disturbing trend. Mark Carney has been warning Canadians for quite some time now, but only recently are people starting to listen. This is because for the first time in 12 years the debt-to-income ratio of Canadians has surpassed that of the USA (147% to 148%). It's strange how politicians have only now started to speak out against this trend since the USA level has been passed, but now Finance Minister Flaherty and even Prime Minister Harper have heeded their own warnings as well. Surely this will gain more and more attention in the coming weeks and months, which is likely a good thing because many Canadians need to wisen up with their debt.
That being said, recent studies and surveys have suggested that Canadians will be able to handle a slight rise in interest rates, but will come under pressure if a significant move were to happen (anything over a 2% raise I suspect). I think this is what Carney is trying to prepare Canadians for in 2011. The first meeting is early January, and what comes out of that meeting will be a good indicator of how the rest of the year will play out in my opinion.
Along with a rise in interest rates, obviously unemployment is also a threat given the high debt. Should unemployment increase we will likely see more defaults and cooling of the housing market. Couple this with higher interest rates and we've got a problem, Houston.
The third major threat along with higher interest rates and higher unemployment is the high value of the CAD. I don't see this threat going away any time in the foreseable future given Canada's reluctance to manipulate their currency, as well as inevitable interest rate hikes. The mantra from the top right now is for businesses to invest (machinery, equipment, etc.) in order to increase productivity, which has historically lagged in Canada for whatever reason.
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And now the optimistic side. Oil and natural resources in general are in high demand as usual, and Canada has a high supply. The more we can tap into these resources, this industry is certainly capable of at least maintaining the economy at the status quo. Again, this speaks to the emphasis on business investment and higher productivity.
Canada is also diversifying their economy away from the USA at a speedy rate. Exports to the USA are now only 72% of total exports, with emerging economies like China and India increasing their share.
The low debt levels of the government is allowing them to lower taxes, especially for businesses. This will remain the trend for as long as the Conservative government is in power, making it attractive to open up shop in Canada.
My response is sort of long-winded, but I think it's beneficial to take a step back and look at the big picture sometimes. My personal opinion on the Canadian economy as a whole for the near future is cautiously optimistic. Play close attention to the BOC meeting in early January, I think they'll give some significant clues. Any thoughts?
