Appetite for debt: How the economy benefits when consumers and companies borrow more
OTTAWA — Just like cholesterol, there is such a thing as good debt and bad debt. It all depends on the relative health of companies and consumers, and who they are consulting.
While credit growth among Canadian households and businesses edged up in March, the appetite for residential mortgages has stabilized at the same time as the frenzied housing market is showing signs of moderation.
That’s good news. At least consumers are still borrowing and spending — albeit with more discipline, even if they have added some extra weight to their bottom line. The same goes for companies, who have steadily raised their financing levels over recent months.
Overall household borrowing grew in March at a year-over-year rate of 4.1%, up from 4% in February, according to a study by RBC Economics, released Tuesday.
Residential mortgage growth was unchanged at 5% in March for the fourth consecutive month, RBC said. Outstanding balances of non-mortgage loans — such as credit cards, personal loans and lines of credit — rose 2% in March from a year earlier, following increases of 1.7% in January and 1.9% in February.
“Residential mortgage growth has stabilized in recent months and upside risks of renewed momentum are likely to be contained as housing activity is forecast to gradually moderate after a prolonged period of robust price and sales gains,” RBC said.
A brief period of financial frugality seems to be ending as consumer credit growth is on the rise
“In contrast, the emergence from cycle-lows for consumer credit indicates households have increased their appetite for non-mortgage loans,” it added. “With offsetting effects, overall low rates of household credit growth will likely be sustained.”
Now the bad news, if indeed it is.
“A brief period of financial frugality seems to be ending as consumer credit growth is on the rise,” RBC warned.
“After expanding at its slowest rate in two decades late last year, the first quarter of 2014 has seen the pace pick up.”
All combined, the evolving scenario would see the Bank of Canada holding the line on its trendsetting interest rate at 1%, where it has been since the last hike back in September 2010.
Bank governor Stephen Poloz has been keeping his options open — in other words, not signaling whether the next rate move will be up or down — as he monitors currently low inflation trends for signs of welcome price increases, which would signal strengthening economic growth.