Posted 5.12.14 @ 12:40 by: Staff

With interest rates on the rise, Canadians are beginning to pull back on their borrowing - but not their spending. For the last few years Canada’s economic titans have been asking Canadians to pull back on how much they’re borrowing and increase their savings… and while they’re finally putting away the credit card, their savings aren’t increasing.

What gives?

Household debt to disposable income ratios hit 164% last week - that means for every Loonie Canadians have after bills, they owe $1.64! That level of spending just isn’t sustainable and it could spell some real trouble for people across the country, especially for those that want to buy a home in the near future.

Consumer Spending at an All Time High

Even with borrowing and debt slowing down, consumer spending is at an all-time high. Some blame this on the steady flow of American retail chains moving up into Canada over the last six months, others say that a slowing home market makes consumers go on a “retail therapy” binge.

Whatever the cause might be, if incomes don’t rise to match the rate of spending, if interest rates continue to stay at 5% forever, it could spell serious trouble for the Canadian economy.

Debts Slowing Down

On the plus side, debts are slowing down. They’ve dropped from 165% debt to disposable income to 164% - this is the first time it quit climbing since 2001. While it doesn’t seem like a big deal, it really is. Just imagine what you could do each year with 1% more money in your pocket!

Now imagine all of Canada having that 1% extra in their pocket, imagine what that could do for savings, for the economy, if that 1% went towards debt payments. 1% over the course of $77.7 billion of Canadian net worth is a lot of money back in the pockets of Canadians like you and me every year.

But unless incomes can come up, if debts can start moving in the other direction and spending is tempered with inflation, it may not be all good things.

Inflation Worries Still on the Horizon

With the Canadian household debt rates on the decline, it’s finally time for the economic czars of the country to cast their eyes on a real problem that we’re all facing: interest rates.

Super low interest rates were great for the housing market, they pushed more and more people to buy homes that may not have entered the market so soon. But all good things must come to an end, and no matter what the Americans think, interest rates just can’t stay this low forever.

Interest rates have to rise so that people start saving again; think about it, if you’re not earning anything from your savings account, why would you save? Why would you invest in a business? Why would you buy bonds or buy into the market?

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