Household spending down, Canada potentially facing recession

After more than a decade, a recession is seemingly right around the corner.

The Bank of Canada predicts 2.1% growth this year and 1.9% growth the year after.

That suggests a slowdown in the economy yet that is nowhere near a recession, which begs the question of why people are so worried about one?

This reason becomes clear when you look at the past and current state of the economy.

Many of the events that are happening right now are events that are evidently at the tail end of an economic expansion and the start of a recession.

A good signal of a recession is declining auto sales.

In November, auto sales declined 9%, which is the largest drop since the last recession. Auto sales are a good signal of an imminent recession because cars are usually the first thing consumers stop buying when they see financial trouble ahead.

Household borrowing is also down to a 35-year low along with yield curves that are pointing towards troubles in the financial market ahead. Consequently, these indicators make it seem like Canada is closer to a recession, and if this is true then we might be in big trouble.

Consumer willingness to borrow and spend on products has been a primary economic engine for Canada for more than a decade. In fact, this was one of the main reasons that Canada emerged from the 2008 recession relatively unscathed.

If we look at the graph above it is evident that household expenditure is the majority of what makes up our GDP as of now. With this increase, the importance of household expenditure is more significant than ever before.

Currently Canadian debt levels have increased to an astronomical high of $2.2 trillion in total debt, which is up by almost a trillion dollars in the last decade.

This ever-increasing debt is the offspring of long interest rate decreases, which gave Canadians their cue to binge on debt. Canadians are now in a unique position of feeling the pressures of paying it back at rising interest rates. This alongside the federal government’s stringent mortgage standards, the amount that Canadians can afford to borrow has reduced by about 20 percent.

These two simultaneous changes is what has caused the housing market to become unstable. Urging some to believe that this might just be a catalyst for an impending major correction, while some believe this is just a small tremor and the market shall rebound.

Recession or not, it is evident that Canada is not in a great position this time around if it were to be hit by one in the near future.

The high levels of debt are extremely worrying and with the backbone of the GDP decreasing, it is important to realize our current state.

With the Bank of Canada trying to curb expansion by raising interest rates, it is crucial for Canadians to start paying off their debt or many of them will be the hardest hit.