After witnessing the experiences of other countries during the global credit crisis, and living through the painful deleveraging here in the 1990s, Canadians are very cognizant of the dangers of excessive debt leverage, according to a special report released today by Scotia Economics, entitled Canada’s Balance Sheet & Economic Advantages Mitigate Household Debt Risks.
“There is understandable concern about the rapid rise in borrowing, and the buoyant housing market in particular, that has pushed Canadian household debt leverage to new records,” said Warren Jestin, Chief Economist, Scotiabank. ‘However, our analysis suggests that the odds that current household debt leverage will trigger a full-blown relapse - either in the housing market, or more generally in the economy - are relatively low.”
According to Mr. Jestin, “today's situation is much different than the early 1990s when corporate, household and government balance sheets were simultaneously imperiled and monetary policy was much more restrictive. Canada entered the recent downturn with close to two decades of government fiscal repair, strong corporate balance sheets, and a world-class banking sector.” He goes on to say, “even with the continuation of low borrowing costs, existing debt burdens coupled with reduced employment gains point to a cooling of consumer spending and housing activity in the year ahead.”
The report also notes that the structural features of Canada's financial sector - and, more specifically, its mortgage market - operate as a last line of defense behind Canada's other advantages.