NAFTA is on the table but at least for 2/3rd of the union there is some union as Canada’s Consumer debt follows as scary pattern akin to America
At the end of July, propriety data from UBS showed that US consumers are coming under increasing strain as leverage rises faster than earnings.
According to the proprietary UBS Evidence Lab survey, the percentage of lower and middle-income consumers that have ‘strained’ finances (consumers are ‘strained’ if their monthly income barely covers or is below monthly expenses) remains near peak levels, at roughly 36% of all US consumers.
Further, the survey showed that it's not just lower and middle-income consumers that are suffering. According to the figures, 69% of households with an annual income below $40,000 a year can be classified as stressed while 41% of households with an income of $40,000 a year to $99,000 are considered stressed. Around a quarter of households with an income of over $100,000, a year also meet the stressed criteria. In total, these cohorts comprise about 44% of the US consumer population.
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The figures from UBS make it painfully clear how financially stressed the US consumer is after binging on cheap credit for the past ten years. Auto loans are another red flag.
In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion were, topping average pre-crisis levels, according to Wells Fargo & Co. Santander has become the post child of how lax industry standards have become as companies pump up auto lending volumes admitting that it vetted incomes on fewer than one out of every ten loans packaged into $1 billion of bonds.
US consumers aren't the only ones who've binged on cheap credit since the crisis. Canadian consumers have also decided to lever-up.
Canada's consumer debt Hits Record
According to credit rating agency Moody's, this will be a problem for consumers heading into the next downturn. In fact, the level of credit losses forced on Canadian banks and Canada's consumer debt may be greater than 2008 in the next credit crunch.
A new report from Moody's notes that Canadian households are currently carrying a record amount of debt. As of 31 March 2017, Canadians owed $1.69 for each dollar of disposable income, nearly twice the level of 30 years ago ($0.86). The majority of this debt is secured residential mortgages, which were 65% of GDP at the end of 2016, up from 60% in 2012. As mortgage debt has been expanding, revolving credit card debt has shrunk from 4.2% of GDP in 2012 to 3.8% of GDP in 2016. This is a result of the 'low competitive pressures' in the Canadian banking system.
According to the rating agency, Canadian cards are mostly fixed rate, not variable rate as in the US and UK, and annual percentage rates tend to stay high around 18% to 23%, so consumers tend to pay off debt monthly. This was beneficial during the 2008 crisis as Canadian banks’ annualized charge-off rate of 5.8% was about half of the rates recorded in the US and UK.
Still, while credit card borrowing looks under control, Canada's mortgage debt could be more of an issue, especially with signs of a housing market slowdown in the hot property market of Toronto could burst Canada's consumer debt bubble.