The market is facing a significant threat that could potentially impair Canadians' ability to participate in the economy
Canadian Imperial Bank of Commerce has cast some doubts on the ability of Canadian consumers to sustain rapidly rising interest rates.
“A generation of Canadians who have never experienced high borrowing costs is now being tested,” CIBC said in a new analysis. “The claim that, even now, rates are still notably low relative to previous cycles is correct but irrelevant. The entire pool of household debt was taken out in a low interest rate environment.”
Coupled with mounting inflation, the situation represents a potent mix that could threaten Canadians’ ability to participate in the economy.
Still, there is a silver lining for the market, with CIBC offering assurances that “the expected slowing in consumer spending will feel more like a gearing down rather than slamming on the brakes.”
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This is mainly due to the more robust state of Canadians’ purchasing power.
“From a macro perspective, households’ fundamentals are now generally stronger than seen at the eve of previous hiking cycles, and the structure of household debt will shield many borrowers from the full sting of higher rates in the coming year,” CIBC said.
While total household debt currently stands at around $2.7 trillion, just $650 billion (24%) face an actual increase in interest payment this year, CIBC added.
“Based on our expectation that the overnight rate will rise to 3.25% in September and stay at that level for the duration of 2023, and that the five-year bond rate will average 2.45% in 2022 and 2.3% in 2023, this translates to close to $19 billion of additional debt payment this year, or a full percent of disposable income.”
