Household credit growth slowing

Derek Abma, Financial Post · Tuesday, Jun. 29, 2010

OTTAWA — Despite worries about the rise of household debt in Canada, a CIBC World Markets report says the rate of growth has recently slowed down.

Economist Benjamin Tal, the report’s author, said it’s a positive thing that the rate of household debt is slowing. He said the rate at which it grew during the recession and the early stages of the recovery were beyond what was healthy in the long term.

“That’s fine,” he said of the previous growth in debt, which helped mitigate effects of the recession in Canada. “That’s exactly what the Bank of Canada wanted to do. . . . The Bank of Canada cut interest rates during the recession to encourage you and me to go and spend, and that’s how you get out of recession.”

But the pace of growth in consumer credit is now slowing, said Mr. Tal, who pointed out the rise in Canadians’ credit for the six months ended in March was slower than the expansion of nominal gross domestic product, which include the effects of inflation, and it’s the first time in more than seven years that’s happened.

The CIBC report said mortgages are expanding at a rate of 0.6% per month, the slowest since 2003. Lines of credit are expanding at less than one per cent on a monthly basis, the most sluggish pace since 2007, it said. It added that the level of direct loans has flattened.

Credit-card balances, the report said, are rising at a “relatively soft rate” of 0.6% year-over-year with the pace not expected to quicken in the near future.

With the economic recovery now on solid footing in Canada, Mr. Tal said it’s positive that the rate at which household debt grows is slowing. He said the recent economic downturn marked the first recession on record in which overall household debt grew.

Barring another recession, Mr. Tal said he doesn’t anticipate a reversal of trends in which household debt actually shrinks. But he added it doesn’t have to, because the current trend is sustainable.

“Credit is good, credit is OK, credit is a normal thing in a functioning market,” he said. “It’s basically allowing people to purchase for the future using current cash flow to finance it. There’s nothing wrong with it.”

While debt continues to rise faster than income, Tal said what’s more important is that asset levels — which include investments and real estate — are growing at a faster pace than household debt.