Millennials set to face most economic pain in months ahead, RBC says. Here’s why

Canadian millennials, particularly those who own a home, are set to face steep interest costs and economic damage in the months ahead, according to a new report from RBC.

Rising interest rates are set to ratchet up the pain on millennials and younger Generation X adults, RBC argues, leaving them especially vulnerable to job losses should the economy slow sharply in the months ahead.

Debt loads are particularly straining on core-age working adults compared with two decades earlier, RBC economist Carrie Freestone argued in the report released Wednesday.

Older millennials, adults aged 35 to 44, had debt-to-disposable income ratios around 250 per cent in 2019, while Freestone noted that metric was roughly 150 per cent for the same age group in 1999.

Younger indebted millennials — those under age 35 — had debt loads worth 165 per cent of their disposable income in 2019. Meanwhile, the country’s youngest cohort hasn’t seen a material rise in debt-to-income ratio since the late ’90s, RBC says, while noting only about one-third of that group has a mortgage.

“The millennial generation has in many ways been defined by its staggeringly high household debt,” Freestone wrote.

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The debt situation has only worsened for many Canadians since 2019, as low interest rates during the early months of the COVID-19 pandemic allowed many young first-time buyers to enter the hot housing market, saddling owners with mortgages.

Statistics Canada says household debt-to-disposable income rose to 184.5 per cent in the first quarter of 2023, up from 181.7 per cent last quarter. That means there’s $1.85 in credit market debt for every dollar of household disposable income.

While not every millennial owns their home, those who do are especially vulnerable to the higher interest rate environment, which has seen the Bank of Canada’s policy rate rise 4.75 percentage points from the pandemic-era lows.

RBC expects the average Canadian renewing their mortgage could see their monthly payments jump by 25 per cent by early 2024, based on today’s rates for a typical five-year term.

The problem, Freestone explained, is that incomes haven’t kept pace to absorb the pending mortgage shock. The average hourly income has risen 12 per cent since the start of the pandemic, marking less than half the expected jump in mortgage payments.

The end result? RBC expects that consumption in this middle demographic will take a substantial hit this fall, particularly if millennial and younger Gen X workers are struck by job losses.

“While growth is still holding up even after record rate hikes, higher unemployment rates may trigger an entirely different outcome for demand in the year ahead,” Freestone wrote.

Many economists expect Canada’s economy to slow and the job losses to rise this fall as the lagged impact of higher interest rates starts to bite.

CIBC said in a report released Tuesday that it expects the unemployment rate to creep above 6.0 per cent, up from 5.5 per cent in July, by early 2024. The jobless rate has been rising steadily over the summer, up from near-record lows of 5.0 per cent at the start of the year.

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The CIBC report said signs of easing in the labour market this summer should be sufficient to keep the central bank from hiking at its next rate decision on Sept. 6.

If unemployment rises according to its forecast, that could even convince the Bank of Canada to start cutting interest rates as early as the first quarter of 2024, CIBC argued.