In contrast to a small bit of deleveraging in the US following the great recession, credit expansion in Canada went into overdrive.
Will Canada’s debt frenzy stall, or will it implode?
Canada has entered the very late innings of its super-charged private sector credit cycle, one that has completely decoupled from that of its largest trading partner, according to Macquarie Analyst David Doyle.
“Canada’s private sector nonfinancial debt to GDP ratio (includes household debt and non-financial business debt) has skyrocketed since 2005, rising by over 60 percentage points,” he wrote. “This is a greater magnitude of increase than occurred for the forty years prior (1965 to 2005).”
As a result of this prolonged binge, Canada’s private sector non-financial debt-to-GDP exceeds the comparable U.S. ratio by its highest level on record:
Doyle indicated that it was the smaller retreat in Canadian home prices and the continuation of the commodity supercycle the enabled the credit cycle in the Great White North to decouple so markedly from that of the world’s largest economy.
A best-case scenario for Canada would see the nation muddle through with a few years of sluggish growth, judged Doyle. Fiscal stimulus, a modest pick-up in non-energy goods exports, and growth in the export-oriented segments of the services sector could provide significant offset to the deterioration in credit-sensitive sectors that the analyst sees in the offing.
“We do see a path out, I don’t know if I’d call it a beautiful one, but Canada doesn’t have to look like the U.S. in 2008-2009,” said Doyle.
Forget about the best case scenario. Canada will be lucky to escape outright implosion.
Mike “Mish” Shedlock