By John Shmuel | September 20, 2016
The Bank for International Settlements, a global banking body, is warning that Canada has one of the highest credit-to-GDP ratios in the developed world and that the “unusually” elevated level poses a risk to the country’s banking system.
Canada registered a gap reading of 12.1 in the first quarter of 2016, up from 11.6 during the same period last year. The figure is a comparison of current credit levels to long-run trends. Canada was among the most elevated of developed countries, though it trailed China’s record reading of 30.1.
But the level remains high enough that the BIS singled out Canada as the lone developed country where credit growth remains startlingly high relative to the economy.
“Credit growth continues to be unusually high relative to GDP in several Asian economies as well as in Canada,” the BIS wrote in its quarterly review.
There is some good news in the BIS’ report, however, as Canada’s credit-to-GDP has declined from the highs registered last year, when it reached a gap reading of 15.6 in the fourth quarter. The BIS uses credit-to-GDP as an early warning indicator for financial crises. Its data includes 43 economies, with current credit levels being compared to long-run trends.
Economists in Canada have sounded the alarm on household debt growth for a number of years now. Statistics Canada released data last week that showed the ratio of household credit market debt to disposable income rose from 165.2 per cent in the first quarter to 167.6 per cent in Q2.
Household debt has rapidly risen as housing prices have continually hit new record levels in Canada and homebuyers take out increasingly larger mortgages — as incomes remain stagnant. Toronto and Vancouver have been singled out by the Bank of Canada as two markets where this is a particular concern, as the average single detached home now sells for more than $1 million in both cities.
The BIS said that given low interest rates, countries with high debt loads such as Canada are unlikely to see any stress emerge. And its indicator is not a guarantee that stress will emerge in the future.
But the global banking body again singled out Canada as one country where trouble could emerge if interest rates move higher.
“Estimated debt service ratios, which attempt to capture principal and interest payments relative to income, appear to be at manageable levels at current interest rates for most countries, although they point to potential concerns in Brazil, Canada, China and Turkey,” the BIS wrote in its report.