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Outlook 2012: Debt alarm bells ringing

Canadians showed few signs in 2011 of ending their decade-long love affair with debt, as debt-to-income levels ended the year at a record 152.9 percent. The Canadian Mortgage Housing Corporation, the government agency that provides mortgage insurance, is the latest body to sound the debt alarm, saying on Thursday that household "financial vulnerability remains a serious issue."

The country's leading economists are also stepping up their warnings on the potential economic fallout from Canadian households' high debt levels.

"It's weighing on economic growth today," Avery Shenfeld, Chief Economist at CIBC, tells BNN. "Canadians are to some extent taking matters into their own hands. They've been reading about their own debt levels, they're starting to look at their own balance sheet and we've been seeing over the last couple of quarters is a diminished appetite for borrowing, not so much to buy houses, but to buy other consumer goods."

Shenfeld says that pullback in borrowing means households won't be "shopping as aggressively."

Derek Holt, Chief Economist at Scotia Capital, tells BNN the past decade's strong economic growth has in part been fueled by debt.

"We're operating at leveraged structural peaks across so many different measures in the household sector," he says. "We've had a fantastic party in the past decade but as a consequence we've transferred a lot of demand out of the next few years into the environment of that past decade and we're bound to enter a softening period."

But both economists warn that comparing Canada to the U.S. -- which had similar debt-to-income levels before the financial crisis in 2008 -- is not apt.

"In terms of some of the household sector measures we're quite comparable, but in terms of leverage beyond the household balance sheet it's a night and day comparison and the whole mortgage market in Canada is sharply different than in the U.S.," Holt says.

Shenfeld says statistics can paint a misleading picture regarding household balance sheets.

"If you break the numbers down -- if you look at who has this debt and what is their income -- it looks nothing like the U.S. in 2007," he says. "The credit quality of that debt outstanding is much better [in Canada] than the U.S. was."

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