Philip CrossRising debt levels tempered optimism about increased growth during the first quarter of 2017, writes Philip Cross

OTTAWA, June 27, 2017 – Canadians’ willingness to borrow to finance spending is leaving Canada extra-vulnerable to downswings in the economy, writes Philip Cross in his latest quarterly economic report for the Macdonald-Laurier Institute.

Canada’s real GDP rose 0.9 per cent in the first quarter, continuing an uptick that began last year. After two years of sub-par growth, Canada’s economy will likely return to its post-2009 average of about 2 percent at annual rates.

A few factors are calling the sustainability of that growth into question.

First, there was a reliance on inventory, with firms rebuilding stocks after strong fourth quarter sales. Second, housing continues to be the fastest growing sector, led by Toronto’s potentially volatile housing market.

Yet the composition of spending is not the only cause for alarm.

More significant is the continued expansion of debt, which covers all sectors of the economy—households, governments and businesses.

To read the full report, click here.

A good indicator is the ratio of total debt outstanding to nominal GDP, which surged 36.3 percent in just the last two years. Even as incomes slumped during the oil price crash, all domestic sectors borrowed more and saved less.

“Importantly, this debt was not invested in assets to generate higher income in the future, which could be used for both debt repayment and to raise standards of living”, writes Cross.

“Instead, much of it has gone towards bidding up home prices and increasing government spending on its employees and transfers to households”.

The risk of indebtedness is even greater for Canada, given that its economy is exposed to large swings in its export earnings. This is visible in both its natural resource base, as demonstrated by the sharp fluctuations in the energy sector over the last two years, and in its highly cyclical manufacturing sector. This risk is compounded by the higher cost of servicing debt denominated in US dollars, as the exchange rate devalues, as well as the volatile boom and bust cycle of Toronto’s housing market.

“The risk of debt is that it requires payments even when incomes slow or prices decline, as the US and many European and emerging market nations learned in recent years despite low interest rates”, writes Cross.

Cross’ quarterly economic updates are meant to be a companion item to his monthly Leading Economic Indicator updates.

The Indicator is available on Bloomberg and is intended for journalists and analysts who follow the macro performance of the Canadian economy. Quarterly economic analyses by Cross, based on the results of the indicator, will appear on the MLI website.

To see past Leading Economic Indicators, click here.


Philip Cross is a Munk Senior Fellow with the Macdonald-Laurier Institute. He previously served as the Chief Economic Analyst for Statistics Canada, part of a 36-year career with the agency.

The Macdonald-Laurier Institute is the only non-partisan, independent national public policy think tank in Ottawa focusing on the full range of issues that fall under the jurisdiction of the federal government.

For more information, please contact Mark Brownlee, communications manager, at 613-482-8327 x105 or email at

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