RBC: Canadians' debt servicing woes might worsen

Banking giant warns of the delayed impact of higher interest rates

RBC: Canadians' debt servicing woes might worsen

While the Canadian labour market has exhibited resilience in the first few months of 2023, RBC Economics warned that the worst is yet to come in terms of debt repayments.

“It takes time for higher interest rates to hit consumers’ and businesses’ debt payments,” RBC said in a recent analysis. “A large share of household borrowing in Canada comes from fixed rate mortgages with payments that don’t reset until contracts are renewed.”

The share of household disposable income that is going to debt payments hovered significantly below pre-pandemic levels at the end of 2022, although RBC is expecting this to rise to “record levels” by the second half of 2023.

“That will be compounded by a sharp pullback in household net wealth as housing markets continue to retrench,” RBC said. “With households feeling less wealthy and higher debt payments and prices cutting into purchasing power, consumer spending is likely to slow later in 2023.”

This will be further aggravated by softness in consumer demand and hiring, which RBC is anticipating to take hold in the very near future.

“We continue to expect unemployment rates to drift higher – to 6.8% in Canada from 5% currently by early 2024,” RBC said.

However, this trend might have an encouraging side effect.

“Consumer demand probably needs to soften for inflation to return fully to central bank target rates,” RBC said. “The alternative to the relatively mild ‘bumpy,’ economic downturn we expect in 2023 could still look more like a crash landing down the road if substantially higher interest rates, and a larger pullback in economic activity, is required to get inflation fully back under control.”