Canadian credit borrowing will see a slow return to normal, with the credit growth trend expected to stay below average during the recovery phase following a steep contraction during the pandemic, economists say.
“We will be recovering into some sort of recession. There will be some permanent job loss or long-lasting job loss after this economy is recovering and even after there is a vaccine,” CIBC deputy chief economist Benjamin Tal told Yahoo Finance Canada, “This is usually what you see in a recession… When the job market is not so great, confidence is not so great, credit tends to slow down.”
A recent Scotiabank Economics report found that consumer credit contracted again in May by 1.7 per cent month-over-month and by 2.3 per cent since this time last year. The report cited a spending standstill during the lockdown and said Canadians were delaying larger purchases with a less certain economic future.
“What we have seen is a very interesting situation which the savings rate went up,” Tal said. Despite the gradual business reopening across the country, consumer confidence has been bruised and purchasing behaviour could take some time to fully return to normal.
HELOC borrowing took the biggest hit in consumer credit, falling by 8.7 per cent in April, seasonally adjusted – its fastest rate in its recorded history. Tal explained that in an environment where Canadians tightened spending to only cover the essentials, borrowing against home equity would also tighten.
While consumer borrowing has been subdued during the pandemic, business borrowing saw an expansion over March and April before leveling off in May. Tal explained that small businesses will likely be the biggest casualty.
“We have a situation in which with such a long period of time with reduced business activity and capacity, you will have a situation in which many businesses will not be open again.”
Businesses likely relied on borrowing once their revenues were severely impacted from lockdown and many relief measures like the wage subsidy came too late, Tal explained.
Borrowing began to ease as parts of the country began to emerge from lockdown, though consumers’ slow return to normal shopping patterns means they’re not out of the woods yet.
Mortgage lending was the only area that not only faced zero contraction, but actually accelerated by 7.4 per cent since last month. Scotiabank analysts said this is a likely reflection of rebounding housing activity after it has been depressed during the pandemic.
One of the factors may be the amount of potential home buyers rushing to beat the tightened CMHC regulations, which requires lower debt-to-income ratios and a higher credit score. But it doesn’t tell the whole picture for Canadians who were able to keep their job during the pandemic and found a chance to buy in, Tal said.
“The market is softer than it used to be. That's the opportunity that many of them were looking for. In fact, in a survey that we did CIBC we discovered that roughly 25 per cent of Canadians of homeowners are telling us that they might use this opportunity to buy an investment unit.”
Taking advantage of low interest rates can come with risks depending on your financial situation, according to Graham Priest, an investment advisor from BlueShore Financial. Priest told Yahoo Finance Canada that there is still a lot of uncertainty surrounding this health crisis, stalling the path back to the normal economy.
“Overall, if your outlook is uncertain, [borrowing to invest] could be a risky thing to do if you don’t know if you’re going to have income coming in to pay your debt,” he said.
With anticipated deeper deficits in relief programs, Priest also pointed out a few debt challenges down the road.
“Increasing growth of this debt is only going to stop when we found a vaccine or a treatment, and it really is an economic and fiscal challenge is going to leave higher levels of debt.”