Canadian Household Debt Nears $3 Trillion, Over 130% of GDP

Canadian Household Debt Nears $3 Trillion, Over 130% of GDP

Higher interest rates may have slowed Canadians from borrowing, but they’re embracing hope. Hope that rates will be cut and the debt they’re once again accumulating will go down in cost. Bank of Canada (BoC) data shows household credit jumped in February, and has shown some mild acceleration. This presents a few concerns for the country, which is already seeing its economy turn sluggish in response to the astronomical debt levels.

Canadian Households Owe Close To $3 Trillion In Debt

Canadian household debt held by regulated financial institutions in trillions of dollars.

Source: Statistics Canada; Better Dwelling.

Canadian households have slowed on borrowing recently, but they still accumulated a whopping amount of debt. Households debt climbed 0.3% (+$10.1 billion) to $2.94 trillion in February. This helped push annual growth to 3.4% (+$96.1 billion), and marks the fourth consecutive month of acceleration.

Canadian Households May Be Ready To Continue The Binge

Annual growth of Canadian household debt, including mortgages and consumer credit.

Source: Statistics Canada; Better Dwelling.

The 2020 Rate Cuts Helped Debt Accumulation Soar

If the nearly $3 trillion in debt sounds astronomical, that’s because it is. From March 2020 to the most recent data, households added a whopping $541 billion to their debt pile. At just under 4 years, accumulation was 50% faster than the years preceding rate cuts.  

Canada Is Trading Long-Term Prosperity For Short-Term Gains

The amount of debt is extremely important in contrast to the size of the economy. Accumulation of debt helps to accelerate economic growth, until it becomes too high. 

US Federal Reserve researchers found the accumulation of household debt to GDP boosts GDP in the short-run for roughly a year. However, once it exceeds 70%, each additional point reduces long-term GDP growth by 0.1 points annually. Considering how rapidly its grown over the past few years, that’s a big slowdown on the horizon. 

The latest numbers put the Canadian household debt to GDP ratio at roughly 132% in February. It’s unclear if the impact remains the same at more than 60 points above the threshold, but if it does that’s 6.2 points of growth trimmed over the long term. That’s… a substantial drag on the economy, providing more context as to why the country’s rapid population boom didn’t produce more growth, and instead was largely inflationary. 

For context, the American household debt to GDP ratio is 75% according to the latest data. They’re world renowned for debt, with a ratio almost half that of Canada. 

It’s not a new problem, but one Canada has been warned about multiple times. Everyone from the OECD to the IMF has expressed concerns about the impact on household debt to long term growth of its economy. The Bank of Canada (BoC) being the latest to call out a “productivity crisis,” as non-productive growth continues to drain any stimulus. 

Canada addressed the concerns with its latest budget by [checks notes] … more cheap household debt. Sweet Baby Jesus, what’s happening here?