In Canada, as in the United States, the recovery has hit a menacing roadblock – rising consumer debt. As Canadian consumers begin to worry about their debt levels, spending is dropping off — and that is holding back the economic recovery.
Indeed, much like the U.S., which sees 2/3 of its economy supported by consumer spending, a large portion of Canada’s economic growth comes from discretionary spending. As a result, as Canadians step back and look at their credit card debt, they aren’t liking what they see. They are tapped out and ready to cut back on their spending. And force cutbacks in economic recovery.
What’s Taken So Long?
In America, consumers have been rather frugal for rather a longer period of time. Financial struggles have been more pronounced in the U.S. for longer, and the U.S. economic situation deteriorated so quickly that Americans might have been shocked to frugality faster. The Globe and Mail offers this look at the shift in Canadian consumerism:
While U.S. consumers have adjusted their habits since the recession – saving more, and curbing credit-card debt – Canadians’ appetite hasn’t diminished, perhaps because the economic shock wasn’t as great. The ratio of household debt to net worth is the highest on record, Statistics Canada said Monday, as tumbling stock markets eroded household net worth in the second quarter, while liabilities rose thanks to more mortgage and consumer credit debt.
Clearly, Canadians see that it is time to cut back. And since they appear to be doing so just before the vital holiday shopping season, the economic recovery that has been showing itself in Canada may be imperiled.
Rising Cost of Debt
As the economy has improved in Canada, the Bank of Canada has raised interest rates recently. This has made debt more expensive. The truth is that debt always costs money. But as interest rates rise, debt becomes more expensive. Credit card interest rates increase, and variable mortgage rates increase. This leaves Canadians high and dry, paying more in interest and having less discretionary income to spend keeping the economy going.
And, of course, the higher interest rates may very well be one of the main reasons that Canadians are pausing in their spending to take a look at their habits and credit card balances. With attention drawn to how much debt they have, it is little surprise that Canadians are reducing their spending, and looking toward savings.
This conundrum is a perfect example of why what’s good for the economy is not always good for the individual. The economy would be much better off with more debt fueled consumer spending. However, individuals are much better off if they pay down their credit card debt. It’s a sticky situation, and as more and more Canadians look to their personal economies, the wider economy is likely to suffer.