Rising debt levels are putting Canadian households under growing financial strain while job losses mount, incomes stagnate and personal wealth declines.
The Bank of Canada's bi-annual Financial System Review, released on June 15, said that households are increasingly vulnerable to “adverse shocks” such as an even bigger jump in the unemployment rate, which officially rose to 8.4 per cent in May and is expected to hit double digits this year. (Typically, these figures understate the situation because they do not count 'discouraged workers', those awaiting recall from a layoff, and the under-employed).
“Income growth has slowed, and personal wealth levels have been eroded by lower house prices in some regions; credit growth has continued to outpace income growth, contributing to higher debt levels”, stated the Bank's report.
“At the same time, sharp increases in unemployment are raising the incidence of financial stress among households.”
Although the extent to which Canadians are in debt is less than that of Americans or the British, Canadians' debt-to-income ratio hit a “new high” in the final quarter of 2008, meaning the average household has borrowed the equivalent of 1.38 years of disposable income.
Commercial banks, meanwhile, are setting aside more money to cover bad loans. Some analysts predict that loan losses are unlikely to peak before the industry's 2010 financial year. -Barry Weisleder