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High Debt Levels Mean Canadian Consumers Could Be Sidelined For Decades: Economists

Retail sales peaked nearly two years ago, a clear sign shoppers are running out of steam.
A woman shops at a Sears store in Oakville, Ont., Oct. 6, 2017.
Mark Blinch / Reuters
A woman shops at a Sears store in Oakville, Ont., Oct. 6, 2017.

TORONTO (Reuters) ― The high debt loads and depleted savings of Canadians look set to crimp their spending for as long as decades, economists say, with consumers already scaling back after borrowing costs began to rise in 2017.

Data this month showing a 0.5 per cent drop in May retail sales volumes has added to the subdued outlook for consumer spending, as servicing of debt, which has climbed to a record share of income above 170 per cent, leaves households with less money to buy goods and services.

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Consumer spending accounts for about 60 per cent of Canada’s economy, so a slowdown could undermine economic growth as it recovers from a soft patch at the turn of the year. It could also invite political parties in an October national election to make plans to stimulate the economy.

“Consumer spending has decelerated in recent years, and if you look at things like the savings rate or household debt rate ratios, it appears that Canadians have very little fresh powder from which to draw,” said Royce Mendes, a senior economist at CIBC capital markets.

Inflation-adjusted retail sales are on course to barely grow this year after rising 1 per cent in 2018, the slowest pace since the global financial crisis.


The loss of momentum for retail sales comes despite Canada’s fastest population growth since the 1950s and strong job gains. Consumer spending has been buffeted by a slowdown in the housing market and by Bank of Canada interest rate hikes that have raised overnight borrowing costs by 1.25 per cent over the last two years.

Canada’s economy has grown more sensitive to interest rates after household debt-to-income more than doubled since 1990 to 173 per cent, which means that Canadians owe about $1.70 for every dollar of disposable annual income. The savings rate has fallen to nearly its lowest in 14 years at 1.1 per cent.

Painful process

Economists say that the debt burden has become so entrenched it could take decades for Canadians to dig themselves out.

“It took 30 years to accumulate all that debt … (it’s) difficult to see them moving down significantly faster than that,” said Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets.

Without productivity and wage growth “you’re going to have a tough time seeing consistently strong growth when 60 per cent of the economy is restrained by the debt burdens,” Reitzes said.

The share of disposable income spent servicing debt has climbed to nearly 15 per cent, matching the highest level in Statistics Canada data going back to 1990.

Reduction of household indebtedness would be “painful” for Canadians but the government could help smooth the process, CIBC’s Mendes said.

“Ideally what you would want to see is a little bit of a shift in terms of debt away from the highly leveraged household sector and towards the federal government, which has a relatively very low debt-to-GDP ratio when compared to other G7 nations,” said Mendes.


Canada’s debt as a share of gross domestic product was estimated in the federal budget at about 31 per cent.

Earlier this month, the Liberal government raised a federal child benefit to keep pace with inflation, helping to support eligible families, but others are still scrambling to find bargains.

“I think right now people are so price sensitive that they are shopping around as much as they can, down to a simple dollar here and there,” said Sarah Kaplan, owner of an organic health food store in Ottawa.

(Reporting by Levent Uslu and Fergal Smith; Editing by Sandra Maler)

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