Alarm bells

Recently-released economic statistics should trigger alarm bells in Canada.

Our nation’s household savings rate fell to a five-year low of 1.6 per cent of household disposable income. Savings should provide some breathing room for consumption, but instead consumers have fallen to a major trough.

What does this mean for the outlook in the near-term future?

A collapse in savings destroys confidence, probably impairing financial integrity, and leads eventually to a period of retrenchment while finances are put back in order. Banks may become “loaned up” then in no position to advance funds and, therefore, consumption becomes sluggish at best.

Money for capital expenditures gets to be less available, yet such outlays in the long run fuel the expansion of the economy. Clearly that is discouraging and will entail a slowdown in the economy, particularly in areas such as housing and retail sectors.

The automobile industry now is very apprehensive over loans which have climbed tremendously. Industry executives are worried correctly that customers will return to showrooms before an eight-year term loan has been paid and so find that they owe more on their vehicle than it’s worth as a used car. These longer amortizations are not good for the industry or its consumers, perhaps exceeding the lifespan of most vehicles.

Yet car loans often are interest free. It is no wonder then that car sales have boomed, but at a cost of borrowed sales in the future. That car industry has increased the use of long-term loans and low-cost financing to boost sales to significant mortgage debt and other liabilities at clearly unsustainable levels. Over-leveraged consumers nowadays will adversely hurt business prospects later.

All of this is bad news for future consumption.

The Governor of the Bank of Canada Stephen Poloz already has issued warnings about this situation. Business trade and investment are two areas the central bank has been relying on to propel growth going forward, but even now both are beginning to slump. The central bank is pointing out that mortgage debt must be a call for caution.

Nevertheless, the currently-low interest rates seem to be an irresistible lure. More borrowing is not the answer for consumer indebtedness. Still, purchasers appear willing to forego any discretion.

Consumers’ reckless behavior is a relatively new phenomenon, triggered by artificially-low interest rates. Let’s hope that patterns revert to historic norms before too much damage occurs.



Bruce Whitestone