Canada's Housing Bubble

May 26, 2010 Michael Babad theglobeandmail.com

OECD warns on household debt

Bloated debts among Canadian families pose a threat to the economic recovery, the OECD warns in a new report today. In its semi-annual outlook for the developed countries in the Organization for Economic Co-operation Development, the Paris-based group says Canada’s economy is rebounding strongly from the recession, buoyed by government spending and recovering trade. The job less rate should continue to fall and inflation should remain tame, it added.

The OECD warned, however, that “the high rate of household indebtedness is a source of risk to the outlook.”

The group is not the first to warn about the high levels of consumer debt in Canada. Just recently, the Certified General Accountants Association of Canada said household debt now stands at $41,740 per person, or 2.5 times above 1989 levels. Debt hit a record $1.41-trillion in December, and, according to a survey, Canadians don’t have a problem taking on still more.

While interest rates have been at historic lows as the Bank of Canada battled to bring the country out of recession, the central bank is expected to soon begin changing course, possibly raising rates as early as next week. Indeed, the OECD urged the central bank today to begin pulling back from its extraordinary recession-era measures “without delay.”

While unemployment is projected to continue falling, higher rates could still be a problem for consumers who took on more debt than they can juggle should rates rise rapidly.

OECD projections

The OECD report this morning illustrates how the global economy is sitting on a razor-sharp knife edge. It said the economy is rebounding from the recession faster than anticipated, but the government debt hangover in some countries and the potential for overheating in others, such as China, puts the recovery at risk.

In its forecast for the world’s developed economies, the OECD pegged global growth at 4.6 per cent this year and 4.5 per cent. And, in a particularly bright note, said unemployment may have topped out at about 8.5 per cent, well shy of its previous forecast.