Canadian Household Debt Mounts to Over 102% of GDP
Canadian households are more indebted than the annual output of the country's economy. Statistics Canada (Stats Can) data shows the gross domestic product (GDP) has recorded modest growth in the Q2 of 2021. The GDP growth was overshadowed by the household debt, which is in excess of the size of Canada's GDP. Most economies with massive household debts usually swap the long-term growth in favor of smaller short-term gains.
Despite the low consumer credit growth, Canadian household debt has only been on an upward growth trend. Its seasonally adjusted outstanding credit stood at a whopping $2.53 trillion in the Q2 of 2021. It implies a 2.53 percent jump from the previous quarter. This figure is resultant of the mortgage debt which is currently standing at 68.7 percent of the total household debt. It is to be noted that this is for the first time since the early 1990s bubble that mortgages have reflected such a large chunk of debt.
The borrowing trend by Canadian households is far exceeding the rate at which the GDP is growing. In the Q2 of 2021, the GDP stood at a seasonally adjusted $2.46 trillion which was 1.92 percent higher than the last quarter. It is to be noted that quarterly growth is approximately a fifth slower than household credit. When debt growth overshadows GDP growth, economies become increasingly dependent on debt to grow more.
Currently, the Canadian household debt has exceeded the country’s total annual economic output. In fact, in the Q2 of 2021, the household debt to GDP ratio hit 102.90% which had risen from 102.28% in the last quarter. An increase in this ratio signifies that credit growth is higher than economic growth. The Pandemic impacted all data of the year gone by. To add to it, the GDP was pushed even lower due to limited trade in the first two quarters. The high household debt to GDP ratio as seen in the Q2 of 2021, meant fewer such circumstances.
When GDP growth is less than the debt accumulation it means that the economy is borrowing from its future income. This ratio has still not stabilized and when it settles it is definitely bound to be higher than what it was in the pre-pandemic times.
Debt growth is fine only till it surpasses the economic output to a certain level. When the household debt to GDP ratio crosses 70 percent, beyond this every time it increases, it has a negative impact on the long-term GDP growth. This effect can certainly be delayed by more debt, but it only means short-term gains as it comes at the cost of future growth. Currently, the country is banking on expensive real estate to bring in some positivity and productivity whereas in normal circumstances, productivity drives expensive real estate. What these worrying trends bring in for the economy remains to be seen.
If you are someone who is looking to take up a mortgage or if you are interested in knowing more about how the household debt to GDP ratio will drive the future of Canada's economy, you can reach out to LendX.