Debt levels will ease, but slowly: Moody’s
TORONTO — With household debt levels as high as they are, it may take a decade for Canadians to achieve a more stable debt- to- income ratio, an economist for Moody’s Analytics predicted Wednesday.
Cris deRitis, senior director, told journalists in Toronto that as interest rates rise, individual consumption slows and income growth catches up with debt growth. The long- term forecast calls for a “gradual easing” of debt levels.
That comes as good news as the Bank of Canada has singled out household debt levels as the biggest domestic risk facing the Canadian economy. Statistics Canada said in June that the level of household credit market debt to disposable income was 163.6 per cent between April and June.
A more manageable debt- toincome ratio would be between 110 per cent and 120 per cent, deRitis said.
“If you make an assumption of four per cent income growth, it’s going to take about 10 years to get back to that type of level,” he said at a media briefing. “From my perspective, we’re looking at a very long adjustment period, even though we’re focusing on perhaps a kind of Goldilocks economy, it’s not going to feel that great for consumers or households. ... Households won’t be feeling very energetic; they’re not going to be consuming as much as in the past.”
He brushed off any concerns of sharp deleveraging. “From the data, we’ve never seen a period where Canadians are deleveraging, reducing debt growth.”
This week, the International Monetary Fund said in Canada “growth is expected to be solid,” thanks to a strong pickup that is likely to continue in the United States during 2014 and into 2015. However, it warned policy- makers that “high household debt and a still- overvalued housing market remain important domestic vulnerabilities.”
Moody’s also predicts a gradual stabilization in housing prices and mortgage balances. “There may be some real corrections at the high end of the market; but that’s largely because it’s been a bit more volatile where people are less price sensitive,” said Mark Hopkins, a senior economist at Moody’s Analytics.