Impact of the coronavirus pandemic lurches on
New numbers from the Bank of Canada indicate that the increase in Canadian household debt continues to outstrip gross domestic product growth as the second wave of the coronavirus pandemic lurches on.
According to an analysis of the BoC figures by real estate information portal Better Dwelling, the debt-to-GDP ratio reached 115% in the second quarter, up from the 101% reading in Q1 and the 97% level recorded during Q2 2019.
From the first to the second quarters of this year, household debt grew approximately 13.83% faster than GDP. To compare, the debt growth pace seen from Q1 2010 to Q1 2020 was 16.09% faster than GDP.
Better Dwelling warned that this trend could sabotage the Canadian economy’s prospects in the medium term – a situation that might be compounded by the recent spike in consumer insolvencies.
“Rising household debt leads to slower economic growth and higher unemployment,” Better Dwelling said. “IMF researchers found a five-point increase in household-debt-to-GDP leads inflation-adjusted growth to decline by 1.25% over three years. They also found unemployment makes a sharp increase, about four years after. The impact isn’t immediately obvious, but it comes later. In fact, the immediate impact is things look better than they are.”
More crucially, “the BoC doesn’t expect GDP to recover for at least two years,” Better Dwelling said. “Meanwhile, household debt has been chugging along, even seeing accelerated growth during the pandemic. Household debt had already exceeded GDP before the onset of the pandemic.”
