Interest Rates and Consumer Debt

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Text transcript

Benjamin Tal, Deputy Chief Economist, CIBC.

As we all know, the debt level in Canada is relatively high. The number one issue is to what extent this will be felt when interest rates start rising, and to what extent it will prevent the Bank of Canada from cutting interest rates. We have to put all this in perspective. First of all, yes, it is true that the level of debt is relatively high. But if you look at the level of new debt, namely the rate at which debt is accumulating, it is actually relatively low. In fact today, credit in Canada is rising at the slowest rate in any non-recessionary period. Namely, you have to be in a recession in order to see household credit rising so slowly. Clearly not a market that is booming by any stretch of the imagination.

This is a reflection of all the changes that will down from a policy perspective, but also a sense of maturity when it comes to Canadian borrowers that are not blinded by low interest rates. In many ways, many Canadians deserve credit for not taking credit. Nevertheless, we are extremely sensitive to the risk of higher interest rates, and we got a sense of it when interest rates in Canada, when the prime rate went up. We are starting to see already some increase in the delinquency rates, some increase in insolvencies, suggesting that yes, this market is clearly sensitive to the high interest rate environment. That was almost a dry run, if you wish, of our sensitivity to higher interest rates. Luckily the increase in interest rates did not last much and therefore the damage to the delinquency channel is not very significant and not impacting banks in a very significant way.

And again, all the change in insolvencies were seen in interest sensitive vehicles. Namely, you don’t see it in auto loans, you don’t even see it in credit cards. Clearly you don’t see it in mortgages. You see it in lines of credit, secured and unsecured. And that’s where you see the increased vulnerability to higher interest rate. The lesson for me here is that we have to realize that as a society we became more sensitive to the risk of higher interest rates. But given low interest rates and the possibility of the Bank of Canada actually cutting interest rates, I think that you will not see a significant acceleration in delinquencies anytime soon.

The question of course is where growth will be coming to the Canadian economy. We don’t have investment. Companies are unwilling to invest and the consumer is clearly not there. The short answer is that the economy will not perform extremely strongly in 2020. Simply you don’t have very strong engines. Yes, the housing market will be there, the consumer will be okay, but nothing to write home about. And we do not expect a significant acceleration in investment and export activity. Overall, to me, this is consistent with an economy that will be expanding by maybe 1.5, 1.6%. Nothing to write home about. And that’s one of the reasons why it’s not unthinkable that the Bank of Canada, at one point in the second, third quarter, maybe will consider to cut interest rates to give this economy a lift. Because in 2020 the economy will not be strong, given the fact that we will not have the consumer to support spending and support economic activity the way we have seen it in 2019 or 2018.