Warning signs: Eight charts to watch as Canada flirts with recession

On several fronts, things are getting worse for the Canadian economy. Growth fades. The job market is giving up jobs. And inflation is very high. In contrast, a growing number of local banks expect Canada to slip into recession by next year.

Mood worsened on Wednesday as the US Federal Reserve predicted that higher interest rates would be necessary to cool inflation. The central bank also expected US economic growth to slow to 0.2 per cent this year – unwelcome news for Canada’s largest trading partner.

How vulnerable are Canadians to the economic downturn? So far, the average family seems to be doing just fine. But there is no doubt that the risks are rising. The longer it takes to contain inflation, the more collateral damage it can spread through the economy.

Here are eight metrics to watch for signs of distress.

Wealth

Canadians are suffering wealth shock. Their collective net worth — total assets minus liabilities — fell by nearly $1 trillion in the second quarter of this year, down 6.1 percent from the first quarter that is the biggest drop ever. The upside: Households are still much richer (about $3 trillion) than they were before the pandemic. Keep in mind that the modification is not over yet. Home prices continue to fall in the third quarter as higher interest rates cool the property market, from which Canadians derive most of their net worth. This might force people to think twice before making big purchases. “Higher interest rates make households look and feel less affluent, and they will also increasingly reduce purchasing power,” Claire Vane, an economist at Royal Bank of Canada, wrote in a recent report.

debt payments

Canadians have piled on debt due to the pandemic. They now owe about $2.8 trillion, up 16 percent from the end of 2019. As interest rates rise, families are allocating a larger portion of their budgets to repayment. In the second quarter, the debt service ratio – the total committed payments of principal and interest, as a share of disposable income – was 13.6 percent. That’s lower than it was before the pandemic – but maybe not for long. Ksenia Bushmineva, an economist at Toronto Dominion Bank, expects the debt service ratio to reach a new record by early next year. I calculated that for the average borrower, debt servicing costs could rise by $2,500 per year by the end of 2023, compared to early 2022. Even if Canadians can afford these higher payments, it could crowd out other purchases.

Hilux

Canadians love to use their homes as piggy banks. Specifically, they take out loans against their homes, known as home ownership lines of credit. The amount owed on HELOCs continues to grow. As of the third fiscal quarter, ending July 31, the six Canadian banks reported domestic HELOC balances totaling $265 billion, up from $228 billion three years earlier. The interest payments are tied to the bank’s base rate, which has risen significantly as the Bank of Canada increased its policy rate. The three-percentage-point increase in the key interest rate since March 1 means that HELOC’s interest-only payments have doubled, from roughly $246 a month to $496 a month, for every $100,000 borrowed.

bankruptcy

Usually, bankruptcies rise in a recession. Not in the decline of COVID-19. Governments subsidized personal income through pandemic stimulus programs, which contributed to lower rates of insolvency (proposals and bankruptcies) and poverty. With these programs expiring, consumer bankruptcies are beginning to pick up again. But these levels remain modest – especially when measured against the rapid growth of Canada’s adult population. Late payments, or late payments of 90 days or more, are rising for many types of loans, but they are no worse than they were in years prior to the pandemic. The numbers suggest Canadians aren’t in financial trouble – at least not yet.

Core inflation

The good news on inflationAnnual rates are declining in the United States and Canada. The Bad: Other measures of consumer price growth have held firm. For example, core inflation in the US – which excludes food and energy – accelerated in August. Canada saw a slight moderation in core inflation last month, but it was not close to levels that would satisfy the Bank of Canada. This increases the possibility that major central banks will continue to raise interest rates to tame inflation. For its part, the Bank of Canada does not see inflation returning to its 2 per cent target until late 2024. The situation is adding to pressure on Canadians who, for the most part, have not seen their wages steady. with higher prices.

consumption

In general, Canadians deal with inflation in a big way. Retail sales reached $63.1 billion in June, an increase of 11 percent from the previous year. After accounting for inflation, retail volumes rose 1.9 percent. In other words: families spend more, but have not yet started buying less things. That could change soon. In a preliminary estimate, Statscan said retail sales fell 2 percent in July. The drop in gasoline prices that month is likely to have a significant impact. But analysts will look for any signs that consumers are cutting back on their purchases amid severe inflation and rising borrowing costs.

Leasing

Home prices have fallen since February in many markets. But with the rapid increase in mortgage rates, Affordability is actually getting worse. This puts more pressure on the rental housing market, which is chronically under-supplied in major cities and is absorbing record influxes of new arrivals. In contrast, rents are rising almost everywhere. The average demand for all types of property in Canada is up 11.1 percent from last year, according to Data from Rentals.ca. For one-bedroom units, increases are particularly steep in London, Ontario. (36.9 percent), Calgary (29.8 percent) and Vancouver (18.8 percent). Of course, many tenants are covered by rent control legislation that sets annual increases. But for those who are moving into their homes, the market is fiercely competitive and its price is increasing.

demand for work

As the economy slows, so does the demand for labor. Job advertisements in Canada have already weakened since May, but remain much higher than they were before the pandemic. There are a lot of signs of asking for help, especially in industries with acute labor shortages, such as healthcare and hospitality. However, the labor market is undergoing an adjustment. Canada has shed jobs for three straight months – this usually happens during a recession – and the unemployment rate has risen to 5.4 percent, not far from a record low. Time will tell whether the adjustment is short or leads to widespread layoffs. In the United States, the situation is complicated. Despite the vigorous debate over whether the United States has fallen into a recession, employers there have created more than 3.5 million jobs this year, so far. And sabbaticals don’t quite align with an economic downturn.