A prominent Canadian economist is warning that record household debt levels in the country will hinder economic growth, and could be a problem for bank earnings.
“The level of household debt is a big impediment to Canadian growth. It could be a problem – I think it will be a problem or a constraint – on Canadian bank earnings,” David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, told BNN Bloomberg in an interview Monday.
“Is it a question of impairing bank capital? No, I don’t see that at all. But I would say we do have, still, a debt bubble of historical proportions in this country.”
Rosenberg’s comments come on the heels of a new report from insolvency firm MNP Ltd., which revealed 48 per cent of Canadians are $200 or less away from financial insolvency, up from 46 per cent in the previous quarter. Those findings come even as the Bank of Canada has left its key interest rate on hold since October.
Based on the most recent data available from Statistics Canada, a gauge of household debt showed that, on average, Canadians owed almost $1.79 for every dollar of disposable income in the fourth quarter of 2018.
There’s also been a growing chorus of prominent voices in recent weeks questioning the ability of Canada’s big banks to handle a softening in the country’s economy.
Steve Eisman, the money manager of Big Short fame who predicted the collapse of the U.S. housing market, recently told BNN Bloomberg that Canada’s bank CEOs are “ill-prepared” for potential credit losses if the economy declines. Of the country’s big lenders, he is betting against Royal Bank of Canada, Laurentian Bank and Canadian Imperial Bank of Commerce.
Rosenberg added it won’t be Canadian stocks that bear the brunt of high household debt levels. Instead, he’s more concerned about the impact on retail sales, which Rosenberg says accounts for 60 per cent of Canada’s economy.
“The one thing we have to keep in mind about the TSX is it’s not a market that’s determined by Canadian GDP as much as global GDP,” Rosenberg said. “We’re really a torque on the global economy. What happens in China actually has a bigger bearing on our stock market than what happens in Canada.”
Rosenberg said while he remains bearish on the Canadian dollar, he sees some upside potential in the Canadian energy sector, which has gained momentum as oil prices have marched higher.
“I would say that if there was one element of the Canadian market that is looking good right now with upside, without having to have any incremental positive news for it, would be the energy space,” he said.