PLANT

High debt, boom and bust cycles equal trouble: MLI

Macdonald-Laurier Institute warns servicing debt adds to the risk that imperils growth.


OTTAWA – A willingness to borrow to finance spending is leaving Canada extra-vulnerable to downswings in the economy, warns Philip Cross is an economic report.

Cross, a Munk senior fellow with the Macdonald-Laurier Institute and a former chief economic analyst for Statistics Canada, cites factors that could impede GDP’s current upswing.

In his latest quarterly economic report for the Ottawa-based think tank, he observes real GDP rose 0.9% in the first quarter, continuing growth that began last year. This will bring the country back to a post-2009 average of about 2% after two years of subpar growth.

But there are warning signs that call into question the sustainability of that growth.

First is a reliance on inventory as firms rebuild stocks after strong fourth quarter sales. Second, housing continues to be the fastest growing sector, led by Toronto’s potentially volatile housing market.

But he is more concerned by the continued expansion of debt, which covers all sectors of the economy – households, governments and businesses.

The ratio of total debt outstanding to nominal GDP surged 36.3% in the last two years. Even as incomes slumped during the oil price crash, he notes all domestic sectors borrowed more and saved less.

“Importantly, this debt was not invested in assets to generate higher income in the future, which could be used for both debt repayment and to raise standards of living”, writes Cross. “Instead, much of it has gone towards bidding up home prices and increasing government spending on its employees and transfers to households.”

Canada is especially susceptible to the risk of indebtedness because the economy is exposed to large swings in its export earnings from sharp fluctuations in the natural resource base, such as the energy sector over the last two years, and the highly cyclical manufacturing sector. Compounding the risk is the higher cost of servicing debt in US dollars, as the loonie devalues, plus the volatile boom and bust cycle of Toronto’s housing market.

“The risk of debt is that it requires payments even when incomes slow or prices decline, as the US and many European and emerging market nations learned in recent years despite low interest rates,” says Cross.

Click here for the quarterly report.

 

Have your say:

Your email address will not be published. Required fields are marked *

*