Pay down that debt while you can

This appeared in the Halifax Chronicle Herald: According to the latest numbers from Statistics Canada released late last week, the country’s economy is firing on nearly all cylinders.

Canada’s annualized growth rate of 4.5 per cent in the second quarter led all G7 countries. Continued robust household spending and strong exports, especially in energy, were credited with fuelling the highflying Canadian economic engine. That’s a good development, of course. A strong economy means more jobs and rising incomes.

News of Canada’s strong second quarter GDP performance also strengthened the loonie against the U.S. greenback. The welcome economic update, however, means higher interest rates — already expected based on past statements from the Bank of Canada — will likely be coming sooner rather than later.

Some financial prognosticators say the central bank could raise the overnight rate — upon which banks base their own lending rates — from .75 to 1.0 per cent as early as this week. Even if it doesn’t, there’s no question a stronger-than-expected economy will hasten the Bank of Canada’s hand when it comes to raising rates. A second interest rate hike was already expected in 2018 but if Canada’s economy continues to sizzle, it would not be surprising if the central bank aggressively acted by raising rates again earlier to try to keep a lid firmly on inflation.

What that all means, of course, is that anyone who’s overextended on credit — and has been relying on historically low interest rates to keep afloat — could very quickly be in trouble.

That includes people with large mortgages and those who’ve been financing major household purchases on credit.

Moody’s Investment Services recently warned that the current unprecedented levels of consumer debt in Canada will eventually lead to substantial credit card losses at Canadian banks.

A bit of good news in the Statistics Canada report was that income growth had exceeded spending, reflected in increased savings rates. But household debt remains much too high. Consumers should pay down some of that debt while they can.