Consumer debt hits new high amid early warning signs of banking crisis

A fresh wave of concern has washed over the growing amount of debt Canadians have piled up.

Equifax Canada said Monday that the country’s consumers owed $1.821 trillion as of the fourth quarter of 2017, a new high that was up 1.3 per cent from the previous quarter and six per cent from a year earlier.

There were signs that Canadian consumers were managing to keep on top of their debts for the time being, according to Equifax. The credit-reporting agency said the 90-day-plus delinquency rate fell by 6.4 per cent year-over-year, and that consumer bankruptcies were down by 1.7 per cent.

“It looks like, given the current economic environment, the debt is still sustainable,” said Regina Malina, senior director of decision insights at Equifax Canada.

However, Malina also noted that the economic environment could change. “I think, because of the high debt, it is more important than ever to remind consumers to stick to the key principles of responsible spending and budgeting,” she said.

Canada’s debt is being watched closely by central bankers both at home and abroad for signs of trouble. Equifax’s figures came a day after the Bank for International Settlements published a report on early warning signs of a banking crisis, which had singled out Canada as one of those that is most at risk.

The Swiss-based BIS said in its report that some credit-related indicators “point to vulnerabilities in several jurisdictions,” and added that Canada was one of those that had stood out, with both its credit to-GDP gap and debt service ratio “flashing red” under the group’s colour-coded scheme.

The credit-to-GDP gap is the difference between the credit-to-GDP ratio and its long-term trend, while the debt service ratios track interest and principal payments compared to income.

China and Hong Kong had similar, red readings as Canada for the two indicators, signifying that those countries’ indicators had cracked a certain level for predicting at least two-thirds of financial crises.

“For Canada and Hong Kong, these signals are reinforced by property price developments,” said the BIS, which is owned by 60 central banks, including Canada’s.

Even so, the BIS said that its indicators should not be viewed as “a definitive warning,” just as a first step toward a broader study.

“Early warning indicators are not perfect,” said Mathias Drehmann, an economist at the BIS, in an online video. “In fact, it turns out that the probability of a financial crisis is around 50 per cent once we see an early warning indicator signal. However, it may even take more than three years.”

But the Bank of Canada has also been eyeing household debt in the wake of its three interest rate hikes since last summer.

The central bank announced last week that it would keep its key interest rate at 1.25 per cent, and Timothy Lane, deputy governor of the bank, said it would be watching how consumption responds to higher interest rates.

“Higher interest rates are also expected to dampen household spending,” Lane said, according to a copy of his remarks. “This effect

Because of the high debt, it is more important than ever to remind consumers to stick to the key principles of responsible spending and budgeting.

is likely to be stronger than in the past, since the average household is now more heavily indebted.”

Lane added that the bank’s decision to move “gradually” has allowed it to absorb new data on several issues, including that, “with household debt at high levels, the economic effects of interest rate increases could be different than in the past.”

In announcing its rate decision, the BoC had also noted that household credit growth has slowed down for three months in a row.

“It’s still too early to firmly call it a trend, and credit data can be volatile ...,” Lane said.

Canada’s economic growth was expected to slow this year, partly because of household debt, according to the Royal Bank of Canada’s economic outlook Monday. “Rising interest rates will take a toll on the highly indebted household sector in 2018, but the softening should be limited by support from a healthy labour market and rising wages.”