There is good news and bad news about household debt in Canada, and the economy in general. First the good news: consumer debt accumulation slowed 30 per cent in Q2 this year compared to the same period last year. This was the biggest deceleration of debt accumulation since before the recession, according to a study released last week by credit reporting agency Equifax Canada. Less good news: the rate of inflation also climbed much more than expected in June.
However, the inflation situation is a classic case of it depending on whose ox is being gored. Statistics Canada reported that the consumer price index climbed 1.5 per cent in June compared to a year ago while many economists were predicting a 1.7 rate. The so-called core rate, which excludes eight products whose prices can fluctuate greatly and suddenly, also increased less than predicted at 2.0 per cent as opposed to the expected 2.3 per cent. Most Canadians, except those in the oil patch, would probably be happy that gasoline prices declined 1.8 per cent and natural gas prices plummeted 13.7 per cent. Likewise most Canadians would think it great that video hardware had dropped in price 14.9 per cent contrasted with June 2011.
Marketnews readers, however, are likely less than thrilled with the last statistic. Another fly in the ointment about that 30 per cent decline in the rise of consumer debt accumulation is that it is largely due to Canadians cutting back on discretionary spending. Coupled with that is the fact that it is just the rate of increase of debt which has slowed. Consumer indebtedness, not including mortgages, is actually up 3.1 per cent, and household debt is at a record high of 150 per cent of household income.
Overall, however, consumers are starting to play the money game smarter. Debts due to high interest credit cards fell 3.8 per cent as contrasted to Q2 in 2011, and consumer bankruptcies declined 4.5 per cent, according to Equifax. Even the assumption of low interest bank loans and lines of credit had slowed down, and mortgage costs are down a per cent.
Perhaps this is the year of the one per cent solution. Mark Carney, Governor of the Bank of Canada Governor pegged its interest rate at 1.0 per cent, and said that inflation will "remain noticeably below" his target of 2.0 per cent over the next year. After Carney's announcement, the Canadian dollar fell a half a per cent to $US.988, which might be a slight bright spot for Canadian retailers concerned with cross border shopping and the new and less restrictive duty free importation rules.
While Carney has noted that recovery from the recession has been fueled by a combination of government stimuli and consumer spending backed by low interest rates, the Bank of Canada has called personal indebtedness the number one risk to the Canadian economy, Consolidated Credit Counseling Services of Canada pointed out an alternate and equally chilling scenario. Should the Canadian economy nosedive again, job losses could put many indebted consumers in a very precarious situation. Carney added a caution in his announcement that a policy of high interest rates may become necessary to keep the economy rolling.
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