Canada is among the seven countries most likely to suffer a debt crisis in the next one to three years, according to economist Steve Keen.
The countries most at risk of a debt crisis, in order of “likely severity” are China, Australia, Sweden, Hong Kong, Korea, Canada and Norway, according to Keen’s report which appeared in Forbes.
The prediction is based on data from the Bank of International Settlements, which publishes data on government and private debt for 40 countries quarterly, as analyzed by Keen.
Warning bells go off when the ratio of private debt to GDP is large and when it’s growing quickly, Keen says. He argues that when all borrowing resources are exhausted, and new borrowers refuse to enter the housing market due to sky-high prices, the growth of credit will fall and demand will drop.
READ MORE: B.C., Ontario housing markets stay ‘flaming hot’ as rest of Canada cools
This is what led to the global financial crisis of 2008, which many countries continue to recover from.
WATCH: Canada’s household debt rises to alarming level
Canadians’ personal debt levels have hit new highs in recent times as interest rates remain at historical lows — along with the cost to borrow the cash to buy that new car or bigger house. Canadians capped off 2015 with $1.65 in debt for every dollar of disposable income.
Among G7 countries, Canada has seen the greatest increase in household debt relative to income since 2000, according to a report from the Parliamentary Budget Officer released in January. The report predicts the debt ratio will continue to rise, as will Canadians’ financial vulnerability “to levels beyond historical experience.”
Keen added to his list of the most vulnerable countries those which have private debt-to-GDP ratios exceeding 175 per cent of GDP, further narrowing that list to countries where private debt has increased by more than 10 per cent in the last year.
WATCH: Bank of Canada concerned about indebted households
“In all of these countries, credit growth is a very significant component of aggregate demand, and when it slows down, their economies will go into recession.”
When the recession will hit is hard to predict, Keen says, as it depends on when borrowers will stop borrowing and lenders will stop lending.
The slowdown can be delayed by government policy such as stimulus and grants, “But the day when credit growth stops can’t be put off indefinitely.
“When it arrives, these countries — many of which appeared to avoid the worst of the crisis in 2008 — will join the world’s long list of walking wounded economies,” Keen concludes.
Comments