There are many signs of rising confidence in the air lately, from the return of real estate bidding wars to new equity offerings and takeover deals. But the surest sign of an economic spring is this: debt is rising again.
This might not sound like good news. The word debt strikes fear in the hearts of millions of Canadians. After all, we’ve spent the past 18 months hearing that debt is terribly dangerous. Debt will curve your spine, clog your arteries and stain your teeth. Debt, we’re told again and again, is what got us into this mess in the first place, and if there was one positive that emerged from the Great Recession of 2008-09, it’s that it forced a massive worldwide flushing of toxic loans from the system—like a warm water enema for the world economy.
That’s all true to a point. For a decade, much of the world laboured under the happy myth that all loans were good loans. It doesn’t matter if Sally Jones is unemployed with no savings. She can get a $400,000 mortgage because rising real estate values will always protect the principal. And besides, financial magic can make that risky loan disappear from your balance sheet in no time. The market collapse exposed all this as the financial snake oil it always was.
Nevertheless, whether we like it or not, we live in a credit-based economy. People, companies and governments buy things with price tags that exceed their bank balances. Store financing for major purchases has become commonplace, credit cards are ubiquitous, and we’re not about to return to the days when people bought cars in cash. If people are spending, that means they’re borrowing.
And so, it was welcome news that Canadian households took on almost twice as much new debt in the second quarter of this year as they did in the first three months of 2009. Those totals ($26.5 billion in new borrowing, $17 billion of it going to new mortgages) are still below the levels seen in the same period in 2008 and 2007, but they’re moving smartly in the right direction.
There have been many insights to draw from the ordeal of the past year, but if the most powerful lesson is that borrowing should be avoided at all costs, then we have missed the point completely. Shakespeare’s admonition to “neither a lender nor a borrower be” had it all wrong. Borrow what you can afford to repay. Lend what you can reasonably expect to recoup. Do that, and this recovery will hold. Otherwise we’ve simply traded one kind of crisis for another.
GRAPH OF THE WEEK: U.S. Borrowing plunges
Canadian debt is rising again, but in the U.S., consumer credit is falling at an alarming rate. It fell by five times as much as forecast in July, marking the longest series of declines since 1991. Economists say restrictive lending and job losses are to blame.
THE GOOD NEWS
Going public at last
Canada’s nine-month drought in initial public offerings has ended. Dollarama Group, the dollar-store chain, is going public on the Toronto Stock Exchange with an IPO that could be worth $300 million. It will be the third big public offering in Canada in the last three months. The mortgage insurance company Genworth MI Canada and the power company Magma Energy also listed on the TSE this summer.
Big spenders once more
The mighty U.S. consumer is spending again. Retail sales in August were up 2.7 per cent, led by increases in automobile sales, which surged more than 10 per cent, and gas sales, which are up five per cent. Much of the increase was due to the cash-for-clunkers program in the U.S., but other key areas, like electronics and clothing stores, also experienced a jump.
Happy homes
There are more signs of life in the Canadian housing market, with the price of new homes up in July. While prices are still down by about three per cent compared to last year, the surge marks the first monthly increase since last September. Among the winners were the markets in Vancouver, Calgary, Hamilton, Windsor and Edmonton.
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