This will be mainly because of Canada’s elevated debt levels
Multiple economic and financial system trends indicate that any North American recession will have a much more significant impact on Canada than on the United States, RBC Global Asset Management chief economist Eric Lascelles warned.
Despite such a recession currently not showing any signs of materializing, Canada’s household debt levels will aggravate any such crash. The nation’s debt-to-income ratio stood at 176% as of Q4 2018, far above the U.S. level of 133%.
“There’s just no latent capacity to spend or to buffer a shock in Canada, and the U.S. is very well positioned,” Lascelles told Bloomberg in an interview. “You could lose your job and you would be okay in the U.S., or rates could go up and you’d be fine, or the economy could turn down and spending could continue. In Canada, you can’t really say that.’’
“If there were to be a recession, whether it’s in 2019 or 2029, or sometime in between, you can imagine Canadians getting hit a little harder than Americans,” Lascelles added. “They just have less room for error, less room to cushion any kind of hit with spending, before they would actually fall into outright dissavings.”
Moreover, the average share of Canadian household income that is allocated to debt servicing was at 14.9% during the fourth quarter, the highest level it has reached in 11 years.
“It’s about as much money as people have spent servicing debt, on an interest plus a principal basis, since records began in 1990,” Lascelles stated. “That’s a concern.”
Crucially, Canada’s household savings rate dropped to 1.1% during Q1 2019, which is “about as low as it gets, historically.”
For perspective, the rate south of the border was 6.7%. The Canada-U.S. gap in this metric has not been this large since the 1970s, Lascelles cautioned.
