Consumer spending is vital to the economic growth of nations worldwide, Canada included, as long as we don’t find ourselves in over our head. While corporations are often chastised for holding a record amount of cash on their balance sheets, it’s actually consumer spending that accounts for the lion’s share of economic growth. Let’s take a closer look at Canada’s latest consumer debt numbers from RBC Economics and what they mean to the future of our economy.
Mortgage and Non-Mortgage Debt
There are two main types of consumer debt: mortgage and non-mortgage debt. If you’re like most Canadians and you aspire to one day own a home, you’ll most likely need a mortgage. Residential mortgage debt includes mortgages with the big banks, as well as non-bank lenders and securitized mortgages. Non-mortgage debt includes all other types of consumer debt, including installment and revolving credit. Common examples of non-mortgage debt are credit cards, lines of credit, and personal loans.
Consumer Debt: By the Numbers
Household credit grew in April by 4.0 per cent year-over-year, following increases of 4.1 per cent in March and 4 per cent in February, according to RBC Economics (Source: RBC Economics – Canadian Credit PDF).
With home prices heading for the stratosphere, residential mortgage growth continues to outpace household credit, as homeowners take on larger mortgages. Residential mortgage growth edged down slightly to 4.9 per cent year-over-year in April, after four straight months of 5 per cent growth.
“Residential mortgage growth has stabilized in recent months and upside risks of renewed momentum are likely to be contained as housing activity is forecast to gradually moderate after a prolonged period of robust price and sales gains,” RBC said.
The outstanding balances on non-mortgage debt, including credit cards, lines of credit, and personal loans grew by a modest 1.9 per cent in April year-over-year, following increases of 2 per cent in March and 1.9 per cent in February. When we drill down the numbers even further, we discover that while personal loans are up a whopping 11.8 per cent in April year-over-year, lines of credit and credit card debt are actually down 0.5 per cent and 1.4 per cent, respectively.
“In contrast, the emergence from cycle-lows for consumer credit indicates households have increased their appetite for non-mortgage loans,” RBC said. “With offsetting effects, overall low rates of household credit growth will likely be sustained.”
Why Consumer Spending Matters
GDP – short for Gross Domestic Product – is a measure of the market value of all final goods and services produced in a country. In developed countries like Canada, the United States, and the United Kingdom, GDP growth is primarily driven by consumer spending. In Canada household final consumption expenditure accounted for 57 per cent of our GDP, according to the World Bank.
A country’s GDP figure is often used as a barometer for the overall health of its economy. When consumer spending grows steadily upward, it’s usually indicative of a healthy economy. It’s important for consumers to keep spending; any slowdown in consumer expenditures will be felt throughout the economy and can lead to higher unemployment rates. With sub-three-per-cent GDP growth forecast for the foreseeable future, it will be challenging for the Canadian economy to grow, especially if households stop spending and taking on debt.
Although consumer spending is important, there can be too much of a good thing. If consumers find themselves saddled with too much debt, it can lead to a slowdown in consumer spending and an uptick in bankruptcies and overall delinquency rates. The Bank of Canada has kept the overnight lending rate frozen at 1 per cent for nearly four years to help encourage consumer spending. If consumer spending slows to a crawl, it can lead to job loss and eventually a recession.
The Bottom Line
Consumer spending is an integral part of a growing economy. If consumers stop spending, it can lead to all sorts of unpleasant consequences, including unemployment and a recession. Through monetary policy, governments can encourage consumers to continue to spend by lowering interest rates and tax rates. Just remember to spend responsibly; only spend money you’ll be able to repay when your bill comes due.
