Debt may be rising but don’t panic: increase offset by household assets

While other economists are warning of an impending crisis, the TD Bank is predicting that debt will not be a problem in 2005.

They said the accumulation of household assets and moderate spending patterns will override any potential for a debt crisis.

“The share of personal income needed to keep a handle on debt interest costs was the lowest on record in 2004, which means that Canadians are not unduly burdened by their debt,” said Eric Lascelles, an economist with TD Bank Financial Group. 

“And, the rising debt level has been more than offset by the growth in household assets. In fact, personal wealth rose by 10 per cent last year in Canada — the fastest pace in almost a decade.”

Lascelles said this was made possible by a sizeable appreciation in the value of existing household assets. Key drivers of this phenomenon were a surging S&P/TSX stock index, which gained 12 per cent in 2004, and a nine per cent rise in the value of existing homes in the last year.

Consumers are likely to keep their wallets open in 2005, but the pace of wealth creation is expected to slow, encouraging individuals to moderate the pace at which they take on additional debt, reported the economists in the latest edition of the semi-annual TD Consumer Pulse. 

“As a result, consumers will continue to contribute to Canada's economic expansion, but they cannot be looked to as the leading edge of growth,” Lascelles added.

The economist said strong spending and modest income growth have fuelled debt accumulation.

“For well over a decade, real personal disposable income has grown more slowly than consumer spending,” said Lascelles. “Whereas real personal disposable income posted an average annual gain of 1.8 per cent since 1989, real consumer spending grew at a faster average pace of 2.6 per cent. 

“The resulting imbalance between income and spending growth caused the personal savings rate to decline almost steadily from double-digit rates in the early 1990s to zero in the third quarter of 2004. 

According to the report, this resulted in rising personal debt levels that hit an all-time high of 113 per cent of personal disposable income in the third quarter of 2004.

“Wealth growth like that enjoyed in 2004 cannot be sustained forever,” said Lascelles. 

While the personal savings rate is likely to rise to one per cent by the end of 2006, this still represents a rock-bottom savings rate, according to the report. 

The stock market rally is likely to decelerate to a mid-single-digit rate this year, reflecting the unsustainable double-digit gains recorded in the past two years and the fact that Canadian corporate profits in 2005 may be dampened by declining commodity prices and a strong Canadian dollar. 

Real estate markets are likely to cool in the coming year, as interest rates edge upward and demand ebbs. 

“As a result, personal wealth should grow by roughly five per cent in 2005, a respectable pace, but not as fast as in 2004,” said Lascelles.

“Looking ahead, the consumer outlook is generally positive, and remains largely devoid of major problems.

“Looking beyond 2005, the longer-term outlook for the Canadian consumer remains good. We expect to see a sustained stretch of faster personal disposable income growth and a rising personal savings rate, while asset returns should contribute significantly to wealth creation, all of which is supportive for consumer spending,” he added.