Global bond sell-off looms large for Canadian economy, especially young and poor
The sell-off of government debt globally continued unabated this week, driving interest rates to new multi-year highs that are looming large over the world economy.
Government bonds are being dumped by investors amid a growing acceptance the global economy is entering a period of higher for longer interest rates. There are numerous theories out there for the surge in rates — sticky inflation, uncertainty about the outlook, continued deficit spending that is driving up supply of debt, tightening monetary policy along with other explanations such as China selling down its holding of U.S. debt. Whatever the reasons, the end result will be far-reaching.
Yields on government 10-year bonds, for example, have broken past four per cent for the first time since 2007, and were trading as high as 4.2 per cent. These yields will filter into higher interest rates for borrowers in Canada.
Investors and policy makers are bracing for impact, and countries will face challenges in different ways.
Canada’s concentrated and well-capitalized banks should fare better than in other places should the higher rates trigger some type of global financial distress. Our governments are still extremely creditworthy despite the sharp increase in debt. If world governments begin to face debt crises, Canada’s sovereigns won’t be the first casualty.
Household trouble
The nation’s households, however, are another matter. Household credit debt as a share of national economic output is the third highest among major economies, according to the Bank for International Settlements, and almost double levels in the euro area. And that doesn’t even tell the full story since average debt numbers obscure the large disparities within Canada. Low income and young families will bear a bigger burden from higher rates.
Wealth and income data released by Statistics Canada this week show low-income families are sitting on debt levels that are 320 per cent of their disposable income, versus 145 per cent for the highest income families. Canadians older than 65 years of age are carrying debt worth 72 per cent, while millennials are holding debt levels that total 252 per cent of income.
To be sure, many will welcome the inevitable cooling of the nation’s housing market that will come with higher borrowing costs. Recent data show a slowdown is already in place, with demand from home buyers in a slump and new listings marching higher. Toronto’s real estate board this week released market data for September that showed transactions fell to the lowest level in six months, even as new listings shot up by 11 per cent in one month.
But there is a risk here too. Falling demand, lower home sale prices and higher rates will make building new homes less lucrative for developers, a challenge for a country already in a severe housing shortage.
Aled ab Iorwerth, an economist at Canada Mortgage and Housing Corp., wrote in an Oct. 3 blog post the country will need to invest about $1 trillion in additional money just to close the affordability gap. At these interest rates, it’s not at all clear how that can happen.
The prospect for interest rate cuts, meanwhile, is pretty slim. Canada’s economy, as well as the U.S., is still seeing the sort of inflationary risks that will give their central banks little reason to resist the surge in borrowing costs.
Labour market data released Friday showed Canadian employment gains are actually accelerating, with 64,000 net new jobs in September. Wage increases are also elevated, with year-over-year pay gains of five per cent last month.
This typically would be welcome news, a positive for worker incomes and job security. The net result however is more ambiguous, as higher interest rates offset gains in the labour market, especially for the young and poor.
