Dec 18, 2017
Pattie Lovett-Reid: High personal debt and low interest rates are a dangerous combo
Interest rates and debt levels should be like blood pressure – not too high and not too low. These words came to me courtesy of a viewer – Brian McCormick from Ottawa.
Interest rates in Canada have been so low for so long we are now seeing some of the intended and the unintended consequences of the accommodative policy. Low rates have encouraged home ownership, supported government spending and borrowing along with some business investment, all in an effort to prop up a weak economy.
At first blush the intended consequences have been working. Canada continues to lead the G7 economies in terms of growth. The question remains: Can this continue without the stimulating support of monetary policy?
According to the Bank of Canada Governor Stephen Poloz in a recent speech, 2018 is “looking positive”, with the export recovery to be “pulled along by rising foreign demand”. If I were to start to read between the lines one could argue rates will be going higher sooner than later in 2018.
In the meantime, concerns keeping Poloz up at night - including cyber threats, high home prices, high debt levels, and youth unemployment – are helping to keep rates low. Youth unemployment remains stubbornly high. However, given the economy is moving into a sweeter spot and wages are beginning to increase, we are starting to see the participation rate among young people move higher.
Back to the unintended consequences on low rates. This environment has encouraged spending over saving. While you could argue this has helped out the economy, what could prove challenging for the economy are higher rates leading to less consumer spending and that will in fact, hurt the economy. Unemployment is at a decade low, but if you lose your job and don’t have a financial safety net or suffer any short term financial disaster those impacted are in trouble – real trouble.
Investors in too many cases have skewed their investment portfolios towards higher risk assets being drawn into a market that appears to have only one trajectory – up – while interest bearing investments like bonds have taken it on the chin. Diversification works over the long term despite short term volatility.
The problem is we have been like Chicken Little for too long – the sky is falling, or rates are going higher.
McCormick believes low interest rates for too long are no good for anyone, especially the public that too easily falls prey to even the simplest marketing, amassing more and more debt.
No doubt Canadians have embraced this low interest rate environment. Spend, spend and spend… to the point where our debt to income ratio hit an all-time high in the third quarter, to the tune of $1.71 of debt for every dollar on income we have coming in. The small silver lining is that we continue to manage that debt – for now.
However, this debt is very real and you have to wonder if we have become too complacent because rates have only one way to go and that is up.
