Canada’s credit cycle has decoupled from the U.S., analyst says

• Canada has entered the very late innings of its super-charged private sector credit cycle, one that has completely decoupled from that of its largest trading partner, according to Macquarie analyst David Doyle.

“Canada’s private- sector non- financial debt- to- GDP ratio ( includes household debt and non-financial business debt) has skyrocketed since 2005, rising by over 60 percentage points,” he wrote. “This is a greater magnitude of increase than occurred for the 40 years prior (1965 to 2005).”

Asa result of this prolonged binge, Canada’ s private- sector non- financial debt- to- GDP exceeds the comparable U.S. ratio by its highest level on record.

In the wake of the credit crisis through 2015, the U.S. economy experienced a painful deleveraging, with the ratio of private sector debt- to- GDP falling by an average of two percentage points per year. Meanwhile, Canada’s credit cycle kicked into overdrive, with private- sector debt-to- GDP rising nearly five percentage points each year.

Doyle indicated that it was the smaller retreat in Canadian home prices and the continuation of the commodity supercycle that enabled the credit cycle in the Great White North to decouple so markedly from that of the world’s largest economy.

It’s hard to think of two economies that are more intertwined than Canada and the United States. Canada’s economy expanded 92.5 per cent of the time the U. S. did since 1983. Two of these divergences occurred during the first half of 2015, and another two in 1986 — the last supply- side- fuelled crash in oil prices.

Desynchronized credit cycles threaten to facilitate a further divorce in real activity between the two nations.

A best- case scenario for Canada would see the nation muddle through with a few years of sluggish growth, judged Doyle.

“We do see a path out, I don’t know if I’d call it a beautiful one, but Canada doesn’t have to look like the U.S. in 2008- 09,” said Doyle.