The key chart
Diverging trends in US and Canadian HH debt service ratios and affordability risks (Source: BIS; CMMP)
The key message
My Canadian friends typically recoil when being mistaken for Americans – and understandably so. They have their own unique nationality, heritage and culture. Despite being close geographical neighbours, they have their own unique experiences too. At the same time, my American friends may recoil when Canadian economic and market commentators allow their own domestic experiences to distort their outlook for US household sector vulnerabilities. Again, understandably so – they each have their own unique experiences.
Confusing Canadians and Americans is rarely a good idea…
For the rest of us the message is clear. Among developed economies, affordability risks are at their highest in Canada, Switzerland, Sweden and France (Lesson #2 from the money sector in 2023). Ignoring key structural shifts in US HH dynamics is a mistake as those who underestimated the resilience of the US consumer found out to their cost last year.
The dangers of confusing Canadians and Americans
Twenty year trends in US and Canadian HH debt ratios (Source: BIS; CMMP)
Note that the US household (HH) debt ratio peaked at 99% GDP back in December 2007 (see chart above). It is now 74% GDP, below the 85% GDP threshold level above which the BIS considers debt to be a constraint on future growth. The Canadian HH debt ratio only peaked 13 years later at 113% GDP in December 2020. It is now 103% GDP, still well above the BIS threshold level.
Twenty year trends in US and Canadian HH RGFs (Source: BIS; CMMP)
The rate of “excess credit growth” (or relative growth factor) – where the 3Y CAGR in debt is above the 3Y CAGR in nominal GDP – peaked in the US at 6.6ppt back in March 2004. In Canada, the rate of excess credit growth did not peak until December 2009 at 7.7ppt. There is one similarity here, however. In both economies, the relative growth factors are currently negative (see chart above).
Diverging trends in US and Canadian HH debt service ratios and affordability risks (Source: BIS; CMMP)
This matters because HH sector vulnerabilities with respect to “affordability risks” are very different in these economies. The HH debt service ratio (DSR) in the US is currently 7.7%. This is 3.9ppt below its historic high of 11.6% and 1.5ppt below its long-term average of 9.2%. In sharp contrast, the HH DSR in Canada is at a record high of 14.4%, 2.1ppt above its long-term average of 12.3%.
Conclusion
Confusing Canadians and Americans is rarely a good idea…
Among developed economies, affordability risks are at their highest in Canada, Switzerland, Sweden and France (Lesson #2 from the money sector in 2023). Ignoring key structural shifts in US HH dynamics is a mistake as those who underestimated the resilience of the US consumer found out to their cost last year.
Happy New Year!
Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.