Good morning,

Canadians owe a record amount of debt, according to consumer credit reporting company TransUnion of Canada Inc., and continue to add to their financial burdens despite the prospect of a recession.

Total consumer debt reached $2.32 trillion in the first quarter of 2023, up 5.6 per cent from a year ago, the company said in a report on May. 31.

“As the cost of living rose, many Canadians turned to credit to alleviate financial pressures,” it said. “Canadians continued to build debt, as total outstanding balances across all products rose.”

Persistent inflation has driven up the cost of almost everything people use in their daily lives, putting pressure on household budgets, especially when paying for mortgages and lines of credit.

TransUnion said the average monthly line-of-credit payment increased 43 per cent from a year ago, while the average monthly mortgage payment rose 16 per cent.

With balances up across all types of debt categories, TransUnion said many consumers were tapping into disposable income to cover their payments.

That was backed up by the first-quarter gross domestic product report released on May 31 by Statistics Canada. Household disposable income fell one per cent during the quarter, the first decline since the fourth quarter of 2021, the agency said, partly because of the rising costs of mortgages and consumer credit, up 14.7 per cent and 10.9 per cent, respectively.

Lower disposable income further resulted in a lower savings rate of 2.9 per cent in the first quarter compared with 5.8 per cent at the end of 2022, Statistics Canada said.

Canadians are among the most indebted consumers of the G7 countries, according to the Organization for Economic Co-operation and Development, with household debt at 187 per cent of disposable income in 2022.

Overall debt levels continued to escalate for a number of reasons. TransUnion said the number of people with access to credit grew 2.9 per cent to 30.6 million in the first quarter compared with last year. The number of subprime consumers — those who pose a greater credit risk — accounted for the largest increase, growing 8.3 per cent year over year.

“While this riskier segment had the highest rate of growth, prime and better consumers still represent nearly three-quarters of total consumers with a balance, indicating a relatively healthy risk distribution of the consumer credit population,” TransUnion said.

The company said overall debt levels also swelled due to a 6.2 per cent increase in people accessing different types of debt, with the largest increase recorded in credit cards as gen-Zers and new Canadians jumped into the market.

However, it said the number of new mortgages continued to fall, down 32 per cent from a year ago as high borrowing rates dampened demand, “especially in the refinance market.”

In a possible sign that higher interest rates are also causing pain, the number of consumers carrying credit-card balances — meaning they did not pay off the full amount they owed at the end of the month — increased 3.1 per cent year over year in the first quarter.

TransUnion also said consumer delinquencies, when payments are overdue by 90 days, “ticked up” by nine basis points to 1.57 per cent, though it noted that remains below pre-pandemic levels.

“As available disposable incomes become more stretched, we expect a segment of consumers will be more likely to miss payments, and as a result, that delinquency rates will rise,” said Matthew Fabian, director of Research and Industry Insights at TransUnion.

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LEADING INDICATOR

Stronger-than-expected economic growth in the first quarter could force the Bank of Canada to end its pause and hike interest rates again during one of its meetings over the summer, economists are predicting.

Gross domestic product, the country’s main gauge on the amount of goods and services changing hands, expanded at a 3.1 per cent annualized pace over the first three months of the year. It’s a figure that blew past Bay Street’s expectations of 2.5 per cent growth and the Bank of Canada’s own 2.3 per cent projection.

“It seems likely the Bank of Canada will be seriously considering raising rates next week,” said Royce Mendes, Desjardins head of macro strategy, in a May 31 note. “While they might pass on changing course just yet, the belief that the central bank will further tighten policy this summer is justifiably gaining traction.” — Stephanie Hughes, Financial Post

Read the full story here.

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QUOTE OF THE DAY

—  Carsten Brzeski, global head of macro at ING, in an interview with Bloomberg, regarding the drop in the price of commodities from oil to wheat to copper, which he says is due to weaker-than-expected demand in China, a possible global recession and slumping industrial output in Europe.

MARKET SIGNALS

BREAKING TODAY

• The Economic Club of Canada hosts an EV panel with industry leaders titled, “Is Canada Ready to Fully Embrace Electric Vehicles?” Andreas Tetzloff, chief executive of Mercedes-Benz Canada; Pierre Boutin, chief executive of Volkswagen Group Canada Inc.; Francis Bradley, chief executive Electricity Canada; and Flavio Volpe, president of Automotive Parts Manufacturers’ Association, make up the panel.
• Calgary Real Estate Board releases home sales figures for May
• Today’s data: Canada S&P Global Manufacturing PMI; U.S. initial and continuing jobless claims, Challenger layoff report, ADP national employment report
• Earnings: Lululemon Athletic Inc., Laurentian Bank of Canada, BRP Inc., Indigo Books & Music Inc.
  

PERSONAL FINANCE

Many couples who have entered into a separation agreement, marriage contract or cohabitation agreement later wonder whether they made the right decision. Some ignore their self-doubt and simply live with the deal they made. Others seek legal advice about whether they can get out of their agreement. Read here about the fate of a “kitchen table” agreement (signed at home with two friends as witnesses) between a couple intending to split up that went all the way to Canada’s Supreme Court.