Are Canadians taking on too much consumer debt?

Canadians have either become savvy stock market investors en masse, or we’re once again tapping credit cards and bank lines to fund our relatively comfortable lifestyles.

Retails sales hit a fresh high in June, data released Friday show, as shoppers shook off a chilly spring and bought up lawn care goods, summer clothes and other general merchandise.

The 1.1 per cent rise (to $42.6 billion) blew past expectations and comes even as the underlying employment and income picture doesn’t appear to support the gains.

June was the sixth consecutive month of rising consumer spending, according to Statistics Canada data.

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“What’s been surprising is the strength in retail sales has not really aligned with gains in employment. It suggests the income is not there,” said Paul Ferley, assistant chief economist at RBC.

Strong stock market gains may be part of the explanation, Ferley said. But a more realistic source of cash for most is the use of credit – which consumers have tapped in record amounts in recent years.

“There is a bit of a question mark on where the money seems to be coming from, it’s a little bit worrying if we’re talking about an increase in the use of debt,” Ferley said.

Tweet This Click to share quote on Twitter: "There is a bit of a question mark on where the money seems to be coming from, it's a little bit worrying if we're talking about an increase in the use of debt," Ferley said.

Debt to incomes

The so-called debt-to-income ratio is the most common metric used by experts to gauge how indebted Canadian households are.

In the fall of last year, that ratio stretched to a record high of 1.64. That means for every $1 in income earned, Canadians owe their banks, credit-card companies, auto dealerships and other lenders $1.64 in debt.

That ratio has leveled off this year to just over 1.63, but it remains elevated, leaving households vulnerable in the event of a job loss or other economic shock.

Moreover, experts suggest consumer borrowing is again on the rise, a trend June’s retail numbers seem to support.

Statistics Canada reports fresh household debt figures on Sept. 12, which could well show a rise in the debt-to-income ratio for the first time this year.

“We seem to be warming up once again. Consumer borrowing trends I look at suggest that a lot of the warnings about not taking on excessive debt at low rates … the impact of that seems to be fading,” David Watt, chief economist at HSBC Bank Canada, said.

“There is an issue in how this is being financed,” RBC’s Ferley said.

“Borrowing is beginning to pick up again,” Watt said.