Canadian economy growing, but so is debt

Canadians have become global leaders in indebtedness, according to the Organization for Economic Co-operation and Development. A preview of the Paris-based OECD’s economic outlook was released Thursday, warning of the amounts of debt families and businesses worldwide have saddled themselves with.

Canada stands out in the report, which noted the country’s debt has “continued to rise from high levels.” Canadian credit to households in the fourth quarter of 2016 was ahead of all other major economies, including China and the United States, standing at about 100 per cent of gross domestic product.

GLOBAL ECONOMIC OUTLOOK RANKS COUNTRY WORST IN HOUSEHOLD DEBT

This may not bode well for Canada and other countries carrying high levels of debt, the report suggested.

“Indebtedness of households and non-financial corporations in many advanced and emerging market economies is high. In many countries, it is continuing to rise,” the report said. “Highly indebted countries may be vulnerable to financial and real shocks, and such indebtedness may undermine the sustainability of growth in the medium term.”

The report’s debt warning comes as Canada is forecast to enjoy economic growth that will outstrip some of its global peers. The OECD, for one, updated its expectations in September, saying the Canadian economy would grow by 3.2 per cent in 2017, best among G7 countries.

But the growth has coincided with Canadians and their various levels of government taking on substantial debt. Statistics Canada reported Wednesday that the combined deficit of the country’s federal, provincial and local governments increased to $18.1 billion in 2016 from $12.9 billion in 2015.

The combined deficit was down from a peak of about $62 billion in 2009, in the thick of the financial crisis, but up from the $9.7 billion deficit for 2008.

StatsCan also reported this month that the value of credit outstanding for Canadian corporations hit $803.3 billion for the first half of 2017, up 4.3 per cent for the same six months last year. The debt-to-equity ratio, however, fell to 0.932 in the first six months of this year, from 0.948 in the second half of 2016, StatsCan said.

But the rising heavy debt load in both consumer and business segments is a concern.

“Despite some deleveraging in recent years, the indebtedness of households and nonfinancial businesses remains at historically high levels in many countries, and continues to increase in some,” the report said.

“Corporate and household debt ratios are positively correlated, suggesting that, in some economies, such as Canada and the Scandinavian countries, risks from high borrowing span both sectors.”

The OECD also noted that home prices in advanced economies have been climbing since the global financial crisis, and that the rise in price-to-rent ratios “has been particularly steep” in Scandinavia, Australia and Canada.

“Although in part this reflects strong population growth, these developments may entail significant risk to financial stability, given the direct exposure of the financial system to the housing market, mortgages being one of the largest asset classes on bank balance sheets,” the report warned.

“Rigid planning systems, such as in the United Kingdom or Canada, restrict the supply of available and affordable housing, whereas more flexible systems such as in Switzerland seem to be associated with more elastic housing supply and smaller demand-supply imbalances.”

The OECD’s main economic outlook is scheduled to be released on Nov. 28.