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Debt concerns registering with Canadians

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After gorging on debt in recent years, Canadian households are trying to kick the borrowing habit and repair their balance sheets as interest rates get set to rise in the coming months, according to a new report from TD Economics. But the report warns that households aren’t cutting borrowing fast enough and the Canadian consumer is not likely to be the main engine of economic growth in the future.

“While households are clearly putting the brakes on debt accumulation in the wake of record debt levels, they are not deleveraging,” the economists argue. “Households are still net borrowers, meaning they borrow more than they save.”

According to the report disposable income growth is likely to be in the range of 4.0 to 4.5 percent, while credit continues to grow at a pace that’s two percentage points higher.

The report also warns that after nearly ten years of taking on higher levels of debt, many households are likely to face headwinds as interest rates inevitably rise.

“Not only does the sheer level of debt leave Canadian households more sensitive to the future rise in interest rates, but households have been carrying a greater share of variable rate debt instruments,” the economists write. “As of the first quarter of 2011, over 46 percent of household debt is tied to a variable rate product, up from 30 percent at the start of 2009.”

But the authors also point out the keeping interest rates too low for too long is a dangerous policy.

“The worst scenario would be one where interest rates are left too low for too long, which necessitates a more rapid tightening of monetary policy that would pose a greater shock to personal finances.” 
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