When asked about how much debt is too much for a Canadian family, Bank of Canada Governor Mark Carney politely declined to go into the details. Appropriate levels of red ink on private balance sheets depend on a number of factors, and the central bank isn’t in the business of personal finance consulting. The BoC does, though, have a benchmark red line after which—regardless of income level, job security and age profile—it believes anyone starts struggling. That’s when debt servicing costs rise over 40 per cent of after-tax income, the governor said at this morning’s hearing before the House of Commons Standing Committee on Finance, his last such appearance as this country’s central banker.
Concerns about high levels of household debt have been a leitmotif of the governor’s tenure, and it looks like that will continue to be the case for his successor. Once keeping up with your debt repayments takes up nearly half of your net income, Carney continued, “there isn’t much margin for error.” If your shifts are reduced—let alone if you lose your job—chances are, you’re defaulting. Right now, eight per cent of indebted households are in such dire straits, the governor said. A spike in unemployment (caused by, say, a slowdown in global growth triggered by another crisis in Europe) could bring that number of “vulnerable” households up to ten per cent. And if the shock is big enough, it can hit the housing market as well, the governor warned his audience. None of that, however, is looming on the horizon, he added—just a scary story central bankers have to include in their modeling exercises, for now. Housing prices are firming up and household debt, which is mostly backed by assets, has been growing at slower and slower rates. It too should stabilize shortly.
Another issue posterity will for some time associate with the outgoing governor is that of the proverbial piles of cash Canadian companies (and companies around the world, truth be told) were said to be sitting on in the aftermath of the financial crisis. Less than a year ago, the governor was scolding businesses for figuratively resting their behinds on something that could have been put to much better use. Back then, though, he had also largely faulted foreign entities and events abroad for stifling investment. Europe was in tatters, the U.S. seemed paralyzed—one could sympathize with Canadian businessmen who didn’t know where to put the money. Today, though, “that uncertainty has dissipated to a certain degree,” Carney noted. And yet, there is still plenty of cash sloshing around.
This time, there are two wholly Canadian factors that seem to be holding companies back: growth lately has been weaker than expected, and, with the oilsands clogged, prices of Canadian crude have been far more volatile than anticipated. That’s, in part, why business investment still isn’t what it should be and exports haven’t gone back to their pre-recession lustre. Consumers, who’ve sustained the weight of the economic recovery, are ready to pass the torch and go mend their wallets, but other sectors of the economy haven’t quiet stepped up.
And yet, the governor, as he readies to leave Canada for England’s shores, managed to leave MPs with somewhat of a happy ending, or at least a reason to hope. On the horizon, you see, is once again America. The U.S. is growing once again, and it might just give us enough of a stimulus to get out of our present funk. The Bank expects our southern neighbour to expand at two per cent this year, a respectable pace in itself but one that might have been nearly twice as much if U.S. lawmakers hand’t opted to hit itself on the big toes with those silly, punitive spending cuts known as sequestration.
But even with that, Senior Deputy Governor Tiff Macklem interjected, Canada should be OK. We’re much more heavily dependent on U.S. private demand than we are on the American government buying goods and services. The housing revival south of the border, in this sense, counts a lot more than the sequester.
Senior Deputy Governor Macklem, in case anyone was wondering—and NDP MP Peggy Nash was—would be happy to be the next governor, if appointed.