Soaring household debt means Trudeau government must dial back coronavirus support carefully

More strain is set to be put on the Canadian economy due to rising household debts in the months to come—putting the tough task of figuring out how to dial back giant support programs on the Liberal government, say economists.

Among developed nations, Canada's debt levels have been some of the highest, which is a strong concern during the coronavirus pandemic, according to the National Post.

Benjamin Tal, a CIBC economist said that Prime Minister Justin Trudeau has to begin adjusting his expensive assistance programs as a measure to avoid certain defaults when they are removed which will be "extremely complicated." Ottawa will have to carefully select which programs need to be extended or cut short.

"The debate now is not how much money to spend, but how to start withdrawing it," Tal said.

For years since the 2008 economic recession, Canadian debt holders have been able to take advantage of lower interest rates. But now that unemployment rates have jumped, Canada will have to keep an eye on its household debts even while rates remain low.

“This crisis is exposing our vulnerability, there’s no doubt about it,” Tal noted.

Lenders started offering six-month deferrals for Canadian mortgages earlier this year for financially struggling families.

The policy will not reduce mortgage costs after the deferral period though many may still be out of work. If programs like the Canadian Emergency Response Benefit have to begin dialling back or if people are not able to immediately return to full time work, there will likely be increased mortgage stresses.

“That’s where we’ll see income suddenly falling, and delinquency rates rising,” Tal said.

The CMHC estimates that mortgage deferrals could be requested by around 20 percent of households amid the pandemic—up from 12 percent. It also estimates that about the same percentage of households may be in arrears if there is not a big improvement in the economy.

Canadians have been seeing rising mortgage and credit card debt which economists warn could be a risk for the country's economy.

The Bank of Canada says that household debt has been steadily rising over the last two decades as a GDP percentage and has gone from 58 percent in 2000 up to 99 percent in 2019.

CMHC projections show that it could rise to 130 percent this year as a result of the pandemic. In the US, that figure was 75 percent before the pandemic—in France it was 61.

Credit Union Central Alberta's Chief economist Charles St-Arnaud said these levels will have tough consequences when mortgage deferrals are lifted.

"Something will have to give," he said.

"I think it's a big risk for the Canadian economy going forward."

Economists say that families have been saving more than usual during the pandemic and that this may help household debt risks. If GDP grew rapidly for a few quarters, household debt ratios would be significantly lower.

"In the next year or two, I think the discussion will be deflation, not inflation," said Tal. "However, I think as we reach 2022 or 2023, there's a risk, to some extent, of inflationary pressure."