The Balmy Beach Canoe Club in Toronto is not as old as Canada, which turned 144 on Friday. But the club is 108 years old and a great place to celebrate Canada Day, when red and white abound at the party on the deck overlooking Lake Ontario in Toronto’s east-end Beach neighbourhood.
My wife is a member of the club and that’s where we’ve spent Canada’s birthday these past few years, enjoying the company of friends, the music, the food and, yes, some beverages. It’s a happy occasion where members and guests of all ages boisterously sing O Canada and quietly offer thanks for the privilege of living in this well-blessed country.
But as Canada enters its 145th year, are the happy folks at the Balmy Beach Canoe Club and their almost 35 million fellow Canadians right to be dancing into summer, correct to be assuming that the year ahead will generally be a good one for the Great White North?
Well, yes — generally. The mood of the country is not one of confidence unbound. That would be most unCanadian anyway, eh? But a survey published this week by BMO Financial Group reveals that Canadians are optimistic about the economy, with a majority of small businesses investing in their companies, two-thirds of Canadians confident in their ability to save for retirement and more than 60% optimistic about the housing market.
“Despite ongoing uncertainty in the world economy, Canada remains relatively strong and has been able to successfully shift from recovery to a more mature expansion phase,” said Douglas Porter, BMO Capital Markets’ deputy chief economist.
Nevertheless, as Canadians wake up after enjoying Friday night’s fireworks, Mr. Porter and others acknowledge that there are still problems to be faced, including household debt levels that, despite a slowdown, continue to rise faster than household incomes, rising inflation levels, government deficits that will take years to work down, and overheated house prices in some markets, most notably Vancouver.
The ratio of household debt — mortgages and consumer loans — to disposable income hit 147.2% in the first quarter, up from 146.2% in the last three months of 2010. Meantime, Canadians are now deeper in household debt than their American neighbours — a dubious distinction, indeed.
If you had predicted on Canada Day 2001 that Canadians would be bigger borrowers than Americans in a decade, you’d have been laughed at. Chowing down on debt was, well, un-Canadian. But that was before a long period of low, low interest rates emboldened borrowers, especially in mortgages.
Just this week, Statistics Canada reported that May saw the highest inflation jump in eight years, with consumer prices up 3.7% from a year earlier. That news will in all likelihood not be enough to prompt the Bank of Canada to raise rates when it meets later this month. But governor Mark Carney has previously warned that debt levels could become a problem for individuals and the economy when interest rates inevitably rise.
Canadians celebrating Canada Day 2012 will almost certainly be facing higher mortgage and other interest rates. Remember, a two-percentage-point rise on a 4% mortgage is essentially a 50% rise. As a result, many borrowers have been locking in their mortgages at fixed rates.
If interest rates are not higher a year from now, it will signal that the the U.S. and Canadian economies are still in need of stimulus, that the recovery has stalled and, yes, that the dreaded double-dip recession may be looming.
We hope that next year’s Canada Day celebration at the Balmy Beach Canoe Club will not be muted by such a circumstance. But Canadians, as optimistic as they are as the summer beckons, should know that the year ahead may not go according to general expectations.
Financial Post
whanley@nationalpost.com
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