To mark Financial Literacy Month in November 2023, Equifax released the results of a survey showing that Canadian consumers are concerned about their ability to pay their bills on time.
Young adults are at greater risk. Among respondents to the credit rating agency's survey, 36% of young adults aged 18 to 34 reported missing a bill payment in 2023, compared to 23% of all respondents.
According to the responses, 52% of young adults are anxious about their personal debt, significantly higher than the overall average of 39% of other respondents.
Early warning signs
Payment defaults are among the early warning signs of the impending recession that economists have been consistently highlighting. The signs are more pronounced in the United States, notes Sébastien McMahon, Chief Strategist and Senior Economist at iA Financial Group.
"In the United States, we are already seeing higher credit card defaults, and auto loan defaults are also starting to rise. For credit cards, the default rate is at 8%, whereas the pre-pandemic rate ranged from 5% to 6%. This hasn't been seen since 2011. During the 2008 crisis, it had risen to over 13%," he pointed out during an economic outlook interview with the Insurance Portal.
At the time of the interview, Mr. McMahon did not yet have figures on the trend in credit card defaults in Canada. He also said he was closely monitoring the situation regarding mortgage loans. According to Equifax's survey, 36% of Canadians are concerned that their mortgage will be renewed at an interest rate higher than they can afford.
The data collected by the credit data firm reveals that 31% of respondents had to find additional income to absorb the increase in their mortgage or rent payments, and 35% are concerned about job security.
Interest rates remain high
Despite slowing inflation in the country, the Bank of Canada is holding firm on monetary tightening. The inflation rate measured by the overall Consumer Price Index (CPI) decreased to 3.1% in October 2023. It is getting closer to the Bank of Canada's target of inflation between 1% and 3%. Inflation measured by the overall CPI had fallen to 3.8% in September, down from 4.0% in August.
Other factors are keeping the cost of living high, according to the Canadian central bank. "However, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high," it said when announcing its decision to maintain its key rate at 5% on October 25.
According to the Bank of Canada, short-term inflation expectations and business pricing practices are normalizing only slowly. It also points out that wage growth remains around 4 to 5%. "The Bank’s preferred measures of core inflation show little downward momentum," the bank adds.
The Bank of Canada began a monetary tightening cycle, raising its key rate from 0.25% in March 2022 to 5% on July 12, 2023, after a series of successive hikes. The Canadian central bank announced on December 6 that it was keeping the rate at that level.
Worried businesses
Meanwhile, business confidence is waning. The Canadian Federation of Independent Business (CFIB)'s Business Barometer reveals that nearly 50% of small and medium-sized enterprises (SMEs) are experiencing declining sales.
Its 12-month SME owner confidence index continued its decline in November, reaching 45.6 points. "Outside of the past three months, sub-50 index readings have only been recorded during the 2008/2009 and 2020 recessions," says CFIB.
In the CFIB barometer, a level below 50 means that there are more pessimistic owners than optimistic owners about their business performance. The November results show, among other things, that 53% of SME owners are concerned about borrowing costs.
Hope on the horizon in 2024
"The European Central Bank (ECB) appears to be in the best position to initiate interest rate cuts," says Sébastien M. McMahon. According to him, this is because the ECB has had a more restrictive monetary policy. "It will have favorable conditions to start cutting rates in the early months of 2024," explains Mr. McMahon. He added that total inflation "had fallen 2.5% in the Old Continent."
In Canada and the United States, Mr. McMahon expects the first rate cuts to occur in mid-2024. "Markets are increasingly anticipating interest rate cuts starting in mid-2024, both from the Federal Reserve and the Bank of Canada," he noted. He also recalled that the Governor of the Bank of Canada, Tiff Macklem, suggested in November that rate hikes may be over.
