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For the first time ever, Canada’s private sector is racking up debt faster than any other of the world’s 22 advanced economies, putting the country at risk of serious economic consequences, according to new research by the Canadian Centre for Policy Alternatives.
A new report authored by CCPA Senior Economist David Macdonald reveals that Canada added $1 trillion in private sector debt over the past five years ($2016), with the corporate sector responsible for the majority of it.
Economies can become dependent on debt in order to fuel economic and asset price growth. With both rapid private debt accumulation and a high private debt-to-GDP ratio, even a small change in debt growth rates, brought on by changes in interest rates for instance, could have a devastating impact on the larger economy.
“Private sector debt growth is one of the best predictors of economic crisis, and Canada is now the only advanced economy squarely in the debt ‘danger zone’ of having high private sector debt that continues to rise rapidly,” Macdonald says.
The report identifies several areas of concern:
- Canada has never before led the advanced economies in private debt growth;
- The last time Canada was close to leading the world in private debt growth was the early 1990s, just as housing prices plummeted and then stagnated for a decade;
- The country’s private debt-to-GDP ratio has risen by a fifth since 2011, from 182 per cent to 218 per cent. The US ratio currently stands at 152 per cent;
- The $315 billion increase in household debt since 2011 ($2016) is almost entirely attributable to the rise in mortgage debt related to rapid home prices increases;
- Corporate debt is less well studied, and rose $671 billion since 2011 ($2016), accounting for two thirds of private debt accumulation over that time;
- Corporate debt was largely spent on mergers and acquisitions as well as real estate purchases, neither of which make the country more productive.
“Canada’s economy has become addicted to binging on ever more private sector debt, and weaning us off it should be our primary public policy concern,” adds Macdonald, who recommends further study of corporate debt and consideration of a housing speculators’ tax to further reign in mortgage debt increases.
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Addicted to Debt: Tracking Canada’s rapid accumulation of private sector debt is available for download on the CCPA website.
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