While Canada’s economic performance so far in 2016 has been very up-and-down, long-term debt levels are a much greater concern for many in the investment community.
Brent Vandermeer is a portfolio manager and director with his own team at Holliswealth. For him, Canada’s debt is simply unsustainable and needs action at both a provincial and federal level.
“After the 2008 crash, a lot of people thought that Canada was so safe compared to other countries,” he says. “If you look at the numbers now, we’re no different than some of those countries that had a major fall. In fact, recent numbers show we are worse off now than most places.”
While Alberta’s economic woes have been well publicized, Canada’s largest province is another real worry from a debt standpoint. Ontario’s manufacturing was identified as a plus point contributing largely to growth in January and February this year. For Vandermeer, however, the debt levels of Kathleen Wynne’s government outweigh any export-led optimism.
“When you look at Ontario, debt-to-GDP is at a very high level,” he says. “California is somewhere people like to point out as bad in this area, but we are actually worse off from that perspective. The other area of concern is consumer debt and that has been in the news a lot recently. It’s at $1.9 trillion now in Canada, and most of that is mortgage debt.”
Statistics Canada released data yesterday showing that the average household debt burden was 165.3 per cent in the first quarter of 2016. This figure is slightly lower than the record 165.4 per cent reached in Q4 of 2015, but still at a level way above what most would deem sustainable.
“Stephen Poloz from the BoC is much more vocal about this now,” says Vandermeer. “Despite the repeated warnings from the central bank, people are not responding and house prices and debt continue to rise. People are saying, ‘I have to get in now, even though it doesn’t make much sense.’ That is usually when you’re getting close to the top of a bubble. Eventually it will burst.”
The fact that this debt burden is growing at the same time as the economy in general remains on shaky ground means The Bank of Canada is unlikely to raise interest rates anytime soon. This puts the BoC and the government of Justin Trudeau in a tough situation, but one the head of Vandermeer Wealth Management believes needs immediate remedy.
“You look at places like Alberta, which is really going through a hard time – if you raise the cost of borrowing then it hurts other areas of the economy,” he says. “I think one of the only ways you can fight this debt is on a policy level and making restrictions on lending. We have reached a point now where prices are so out of whack I think the government has to act.”