Buckle Up

Steve Saretsky -

“We took on debt so Canadians didn’t have to.” That was the message from PM Trudeau following the latest figures which show direct federal aid to individuals and businesses as a result of COVID-19 has now reached $212 billion. Of which, $55B has gone directly to the pockets of 8.25 million Canadians who have collected a CERB cheque.

Indeed the numbers are head turning, The federal government now expects to post a $343-billion deficit in 2021. And while these figures are pause for concern, the current economic outlook provides very few options. Private sector balance sheets in Canada are a mess, private sector debt to GDP sits at just over 260%, one of the highest in the G-20. Years of borrowing in the household and corporate sector have left the Canadian economy in a vulnerable scenario, one which now requires the public sector to fill the void.

Left unchecked, the demand destruction could sew the seeds of a private sector debt crisis. Economic studies are mounting regarding the perils of private sector debt. Ex banker Richard Vague, in his most recent book ‘A Brief History of Doom’ highlights this relationship. Every economic crisis over the last 150 years has manifested: the combination of private debt to GDP of 150% or more and an increase in the ratio over a 5 year period of 17% or more. Until the moment of reckoning, things may seem wonderful. Rapid private-debt growth fuelled what were viewed as triumphs in their day—the Roaring Twenties, the Japanese “economic miracle” of the ’80s, and the Asian boom of the ’90s—but these were debt-powered binges that brought these economies to the brink of economic ruin.

This places Canada squarely in the danger zone, having hit all of these milestones. Hence the rapid intervention from the Federal Government to spend into oblivion.

However, like everything in life, for every action there is a reaction. The recent downgrade of Canada’s credit rating may be the first of many according to David Rosenberg, one of Canada’s most respected economists. Adding, Canada’s 350 per cent total debt-to-GDP ratio compares to 330 per cent in the U.S. — the latter having the most powerful army in the world and the world’s reserve currency which means the Fed has the largest printing press of all and it gets its ink for free. Italy’s debt ratio is 360 per cent and its credit rating is BBB. Greece is 340 per cent and it is rated BB-. Spain’s debt ratio is 360 per cent and it has a BBB- ranking. And China is at 290 per cent and has an A+ rating by S&P. So Canada, even as it stands, deserves a AAA sovereign rating based exactly on what criteria?

Once again, there is no easy way out. Without fiscal spending the crushing debt loads in the private sector would surely cripple the economy. It’s a case of damned if you do, damned if you don’t. Fiscal spending will blow-out to new heights, buckle up.

Three Things I’m Watching:

1. Private sector debt growth in Canada places it in the danger zone.

2. The Canadian economy added nearly 1million jobs in June. However, there’s still a long ways to go.

3. Canada’s Federal deficit is expected to hit nearly $350B in 2021.

Join the Monday Newsletter

Every Monday morning you'll receive a short and entertaining round-up of news on the Vancouver & Canadian Real Estate markets.

"*" indicates required fields

The Canadian Economy

Steve Saretsky -

To no surprise, the Bank of Canada raised rates again this past week. Another 50bps. Interest rates are now up a whopping 400bps since this tightening cycle began in March. According to Macquarie Research, this is the sharpest calendar year of rate hikes on record going back to 1936. The...

Steve Saretsky -

Lots to unpack this week so let’s dive in. Sales figures for the month of November are making for more negative headlines, as they probably should. There is little optimism in the latest data. Greater Vancouver home sales were down 53% on a year-over-year basis. Over the past two decades...

Steve Saretsky -

Last week we highlighted some recent data from Desjardins which noted that nearly every borrower who took out a fixed payment variable rate mortgage during the pandemic now owes more in interest than their original fixed payment. Trigger rates galore. It appears the Bank of Canada is finally coming around...

Steve Saretsky -

No bottom yet. Data published by CREA last week showed national house prices slid lower in the month of October, dropping 1.2% month-over-month. The national home price index is now down 15% since peaking in March earlier this year, the steepest correction on record since the index was created in...

Steve Saretsky -

The Bank of Canada raised rates by another 50bps this past week, pushing prime rate to 5.95% and inflicting more pain on variable rate mortgage holders. We’ll circle back to that in a second. What’s important to note here is markets were fully pricing in a 75bps rate hike from...

Get the Saretsky Report to your email every month

The Saretsky Report. December 2022