Canadians keep the country’s economy afloat by way of robust consumer spending, fueled by low interest rates and hot housing markets in some regions.
That’s expected to continue into 2017, according to a new RBC report.
READ MORE: Canadians owe $1.67 for every dollar of disposable income: Statistics Canada
“Support continues to come from decent employment gains, and still low-interest rate environments,” said Craig Wright, a chief economist at RBC. “And that all adds up to consumer spending providing a much needed lift for Canada.”
Meanwhile, warning bells over soaring consumer debt continue to sound. So where is the balance?
Low interest rates are intended to fuel spending and encourage economic growth, so clearly the Bank of Canada’s rock bottom rates have been working. Meanwhile, the central bank warned this week that high debt levels are leaving our economy vulnerable.
“Households carrying high levels of debt could find it more difficult to adjust to a loss in income or other financial shock,” a Bank of Canada report released this week said.
“They may be forced to sharply cut back on their spending and, in severe cases, may default on loans. The consequences for the economy and the financial system could be significant.”
Spending is good, Poloz said in an October interview with Global News — as long as it’s for infrastructure.
But Canadians are racking up the debt not just with mortgages but increasingly, consumer debt such as a car loan or line of credit.
“Consumers specifically are vulnerable to any sort of shock when they’re running these high debt levels,” Wright said.
READ MORE: Canadians quality of life trails nation’s economic growth
Canadians should be OK as long as a large economic shock, such as a major housing correction or a sudden interest rate spike, doesn’t come along.
“The metaphor we’ve used in the past is that of a large tree that has a crack in it,” said Bank of Canada governor Stephen Poloz on Thursday.
“The situation may improve or worsen over time, but there’s no immediate crisis until the wrong kind of storm comes along.”
WATCH: Climbing debt loads opening up weak spot in Canada’s financial stability: Poloz
A steady job market is key to consumer debt levels staying manageable, Wright said.
READ MORE: ‘Sudden’ spike in interest rates could trigger housing crash, unemployment spike: CMHC
“Overall as long as jobs are there, people will have income confidence and continue to support the economy,” Wright said.
As for the recent upswing in part-time jobs accounting for the bulk of new employment in Canada, Wright expects spending will more or less keep pace with paycheques.
“As we move forward with the elevated debt levels we will eventually see the consumer spending move more in line with income.”
READ MORE: Low-paying jobs keep Canada’s employment numbers afloat
He predicts spending will settle down as interest rates drift higher.
“That will start to drive home the point that debt has to be serviced,” said Wright. “It will be a bit of a break in enthusiasm of the consumer.”
With files from Patrick Cain
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