It was just last month when we profiled Canada’s “other problem”: record high household debt.

Canada is struggling to cope with falling crude prices which have put enormous amounts of pressure on some parts of the country, most notably Alberta, where suicide rates are on the rise, as is property crime and foodbank usage.

Amid the malaise, households are also being pressured by persistent CAD weakness – which is of course a symptom of falling crude. The currency’s decline has driven up prices for things like fresh fruits and vegetables, 75% of which Canada imports. That puts an extra burden on households that are already laboring under record debt.

As we showed three weeks ago, household debt relative to disposable income is sitting at 171% in Canada meaning that for every $100 in disposable income, households have debt obligations of $171. That’s the highest figure for any G7 country.

That’s disconcerting for any number of reasons. As we wrote, “this would be bad enough in a favorable economic environment with a benign outlook for rates, but it’s a veritable nightmare when the economy is sliding headlong into recession and central planners are hell bent on trying to normalize policy some time in the next five or so years.”

In other words, the outlook for Canada’s economy isn’t good, and that means joblessness is likely to rise going forward…

But interest rates have virtually nowhere to go but up – at least in the medium to long-term. Sure Stephen Poloz may cut rates one or two more times to try and help the oil patch avert certain insolvency, but at 50 bps, there’s only so much lower Canada can go unless the BoC intends to experiment with NIRP. 

This means that households could face the disastrous prospect of rising rates in an unfavorable economic environment. Think a monetary policy mistake like hiking into a recession can’t happen? Just look at what the Fed did in December. Throw in the fact that many families are overburdened thanks to the astronomical cost of housing in places like Vancouver and Toronto and one is inclined to think that some Canadian households may find themselves in quite a bit of trouble going forward. 

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