Consumer debt has emerged as the key area to consider when determining the economic health of North America. Quarter by quarter, statistics show an alarming rising trend in US consumer debt levels as well as Canadian consumer debt levels, leading to heated arguments among economists and policy makers. Such increasing indebtedness on the part of households has far-reaching implications not only on personal financial wellness but also on overall economic performance in both countries.
As wages fail to keep up with inflation and the cost of living keeps increasing, credit cards, loans, and other forms of borrowing are becoming increasingly relied upon by more people and families to meet daily living costs. This then sets up a difficult cycle of debt dependence, especially as interest rates rise and increase. The increase in consumer debt is now widely regarded not only as an individual problem, but as a macroeconomic threat.
The Surge in US Consumer Debt
Over the past few years, US consumer debt levels have climbed to historic highs. Total consumer debt in the US has, for example, recently eclipsed $17 trillion, drawing heavily on mortgage, auto loan, credit card, and student loan debt.
One of the biggest worries is the expansion of credit card debt, which tends to have the most expensive interest rates. With inflation eating away at purchasing power, American families are relying increasingly on revolving credit to pay for staples such as groceries, gasoline, and doctor bills. With wages increasing in some areas, the general trend of income growth is not high enough to counteract these costs, leaving many no choice but to rely on credit.
Yet another level of added complexity comes from the restart of federal student loan repayments, which had been suspended during the pandemic. For most families, this additional burden further aggravates their debt-to-income ratios, raising the likelihood of default and lowering disposable income.
Economists caution that increasing US consumer debt levels can undermine consumer spending, which is historically responsible for about 70% of the country’s GDP. A slowdown in spending, particularly in the retail and housing markets, could result in slower economic growth or even recession.
The Economic Impact of Rising US and Canadian Consumer Debt Levels
A Parallel Trend in Canada
Similar to their neighbors to the south, Canadians too are under increasing financial strain. The latest reports show that Canadian consumer debt levels are now at an all-time high, totaling over CAD $2.4 trillion. Mortgage debt is the largest portion, but non-mortgage debt such as credit card and personal loans are also mounting.
Among the forces driving this surge is the dramatic escalation in home prices in Canada’s large cities. Many who purchased homes piled up huge mortgages while interest rates were at all-time lows. Now, as interest rates rise, the cost of paying off these loans is starting to shoot up dramatically.
The Bank of Canada is concerned about the long-term implications of household debt on the financial health of the country. As interest expense increases, households will have to devote a larger share of income to paying interest on debt, thereby decreasing their capacity to consume and save. This creates a ripple effect throughout the economy, particularly in discretionary-spending dependent sectors.
The alarming increase in Canadian consumer debt levels may also strain public services and safety nets. If there are higher defaults and bankruptcies, there might be greater government assistance requirements, generating additional fiscal pressures.
Broader Economic Implications
The combined effect of increasing US consumer debt levels and Canadian consumer debt levels presents a challenge to North America’s economic resiliency. Higher levels of debt tend to be associated with lower consumer confidence and financial susceptibility. A change towards higher debt servicing and lower savings in both nations can lower the ability to make long-term investments at the household level.
Also, these trends have the potential to affect decisions by central banks. High levels of consumer debt that persist could restrict the scope of the Federal Reserve or Bank of Canada to raise interest rates aggressively without causing large-scale defaults. Policymakers have to tread a delicate balance between regulation of inflation and being able to afford debt on the part of households.
Rising US consumer debt levels and Canadian consumer debt levels threaten economic instability, reducing household spending and increasing financial vulnerability.
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