Canadian household debt grew at slowest rate in two decades: RBC

Canadians continue to rack up debt, but at a slower pace than in the past, which economists say is a good sign for the country’s future economic growth.

Household credit grew 3.9 per cent in December compared to a year earlier, which was the slowest accumulation of debt in almost two decades, according to a new report from the Royal Bank.

The slowdown, alongside growth in the overall economy, signals a shift away from a reliance on consumers to spur economic activity, says Royal Bank economist Laura Cooper.

“The Canadian consumer did a lot of the heavy lifting out of the financial crisis,” says Cooper. “As consumers start to pare back on their debt accumulation we are expectation to see a great rotation towards business investment an international trade.”

Consumer credit, which is personal loans, lines of credit and credit cards, rose by $8.5 billion last year, the smallest annual increase since 1995. Cooper says the 1.7-per-cent pace of expansion was the slowest since 1992.

“The key drivers of growth in the Canadian economy are shifting away from a reliance on households, and the slowing in the accumulation of credit in 2013 is evidence of this,” she wrote in the report.

Consumer credit represents about 30 per cent of household debt outstanding. The other 70 per cent is residential mortgage credit.

Cooper’s report shows residential mortgage debt increased 4.8 per cent, which was the slowest annual pace of growth since 2000. That’s despite a robust housing market, with sales activity that surpassed expectations in 2013.

“Households scaling back on borrowing helps to allay concerns surrounding the exacerbation of elevated risks posed by record high levels of household indebtedness,” Cooper wrote.

That supports expectations that the Bank of Canada will keep its benchmark rate unchanged at 1 per cent this year, where it has sat since September 2010.

To some, the results outlined in the RBC report are bittersweet. While Canadians appear to be taking on debt at a slower pace, the country’s overall household debt-to-income ratio hit another record in the third quarter.

The Bank of Canada has repeatedly warned Canadians about taking on too much household debt, despite the lure of low interest rates.

A recent survey of Canadian banking professionals has also sparked concern about household debt levels, forecasting a jump in delinquencies in everything from credit cards to car loans.

Still, Cooper says there is a healthy level of debt accumulation for both individuals and businesses that helps enhance economic growth

For instance, she notes both short and long-term business borrowing continues to increase, suggesting increased investment that can help to create jobs and spur spending.

In fact, was a 6.7 per cent increase in long-term business financing last year, which is the quickest pace since 2009.

“With global uncertainty diminishing and financial conditions remaining accommodative, we expect the diverging trend between household and business credit growth will continue in 2014,” she says.