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TD Economics: Canadian National Balance Sheet Accounts - Q2 2013


Data Release: National balance sheets remain relatively stable
  • Canadian national net wealth advanced 3% in the third quarter, mostly driven by increased residential real estate gains and a better international net debt position.
  • While net worth advanced for all sectors of the economy, both households and governments became more indebted, while the corporate sector remained the only net saver of the bunch.
  • Canada attributed a 0.7% increase in household net worth to a 1.6% increase in real estate assets. Note, however, on a year-over-year basis, household total and real estate assets are growing at the slowest rate outside of a recession since 2002.
  • Despite an increase in the household debt-to-income ratio to 163%, from 162% in the prior quarter. Household credit continued to moderate, rising by only 4.9% year-over-year, which is the slowest growth rate since the early 2000s. Mortgage credit grew by 5.2% year-over-year, also the slowest pace since 2001 and half the average 10% pace experienced from 2004 to 2009.  
  • Statistics Canada attributed a number of trends in the Q2 national balance sheet accounts to a depreciation in the Canadian dollar.  For one, a weaker loonie made U.S. assets appear more valuable, boosting corporate net worth.  On the flipside, the revaluation of foreign currency loans due to a weaker Canadian dollar made governments look more indebted. Government sector net debt climbed to 51% of GDP, from 50% in the prior quarter. At the national level, the better international net debt position was largely due to the fact that U.S. stock markets outperformed Canadian markets in the second quarter.
Key Implications
  • The rise in the household debt-to-income ratio is arguably the most interesting trend in the release. It’s not surprising to see household indebtedness pick-up as home sales have been rebounding as of late, but we do not expect this trend to continue going forward. In large part, the increase in household indebtedness also reflects softer income growth over the first half of this year. Looking forward, as housing stabilizes and income growth picks up, the debt-to-income ratio is expected to reamin close to its current, still elevated, level.
  • The household debt-to-income ratio most comparable to the U.S. stands at a far lesser 148%, still well below the 163% level reached in the U.S. before their households got into trouble.
  • Despite the rise in household indebtedness, the interest cost of borrowing remained at a record low in the second quarter of the year, suggesting that the average Canadian can cope with their debt levels. However, we are still of the view that the need to keep debt accumulation under wraps will likely keep household spending soft over the next few years.
 
Diana Petramala, Economist