“Atrocious” Economic Data, but Healthier Household Debt Ratios

The most recent economic data is indeed atrocious, as Bank of Canada Governor Stephen Poloz predicted in England late last year.

But there is some terrific news in the data that was released last week on the first quarter results: Canada’s household debt service ratio fell to 6.74%, its lowest level since this number was first recorded in 1990.

It’s been a tough year in economic forecasting. Seven months ago Poloz predicted Canada’s economy would grow 2.4% in the first quarter of 2015; but that was before oil prices tanked, the US economy sputtered, and in Canada activity decreased in natural resources, construction and exports.

We weren’t alone - the US economy had its issues too. The US Conference Board blamed bad weather, a west-coast dock strike and weak global demand for exports, and warned, “what isn’t likely to change is very low inflation and a squeeze on profit margins as costs rise but prices do not.” The May 15 report predicts a modest interest rate increase at the short end of the yield curve late this year or early next, “but we expect very little change at the long end of the yield curve.”

Meanwhile, back in Canada, hard numbers were released by Statistics Canada on May 29—atrocious, as predicted by Mr. Poloz:

• Real gross domestic product (GDP) decreased 0.1% in the first quarter, as opposed to growth of 0.6% last quarter. Stats Canada says this is the first negative growth rate of real GDP since 2011.
• Exports of goods and services fell for the second quarter in a row (-0.3%), following a 0.4% decline in the fourth quarter of 2014.
• Imports fell too: running at only 0.4% after three consecutive quarters of positive growth.
• And the terms of trade tanked for the fourth quarter in a row: export prices fell while import prices increased.

So where is the good news? If you are an employee you made more, especially if you were in the service industry. If you were producing goods, you’ll have seen a slight decline.

Also, household saving rates (the difference between disposable income and household expenses) went up to 5% in the first quarter, a good showing from a rate of 3.6% in the fourth quarter of 2014. Still, the national saving rate (measured as a percentage of national income) declined to 3.5%, the lowest level since the third quarter of 2010.

More important, according to Statistic Canada, the household debt service ratio, (which is household mortgage and non-mortgage interest paid, divided by household disposable income) fell to 6.74%, the lowest level since being first recorded in 1990.

However, when we look to comments by the OECD on the global economy and inflation in its Interim Economic Assessment on March 18 this year, savers hoarding money could also be a sign of other difficulties:

“Year-on-year inflation is already negative in a larger number of countries than at any time in recent decades, and that number is likely to grow before the effects of the oil price decline start to drop out in the second half of the year. It is possible that 12-month inflation will be negative in the five largest economies at some point in the first half of 2015, which would be unprecedented.”

What does this all mean to hard-working Canadians? Deflation increases the real value of debt, so it’s important to get out of debt. But deflation can also discourage spending because people think that prices will drop in the future. When consumers aren’t spending, tax revenues stall for governments and business growth, job security and economic recoveries sputter, too.

That’s why, in times of uncertainty, it’s important to keep a sharp focus on your net worth, and the composition of after-tax income streams. The best buffer against quarter-over-quarter uncertainty in global economics might just be a healthy family balance sheet.

Evelyn Jacks is President of Knowledge Bureau, a national educational institute focused on excellence in financial education. Follow her on twitter @evelynjacks.

Real Wealth Management is the framework for wealth sustainability over time. It requires advisors and their clients to build net worth statements, file tax returns on time and develop financial plans that are regulator and CRA-proof. A free trial of the certificate course is available here.