B.C. Business Matters:
David Williams >>
“Food, glorious food!” sing the ever-hungry workhouse boys in the opening lines of the Charles Dickens-inspired musical, “Oliver!” For the past decade or so, amid readily available credit and historically low interest rates, data from the Bank for International Settlements (BIS) suggests Canadians have been singing a similar refrain about debt, glorious debt…
What wouldn't we give for
That extra bit more
That's all we live for
Why should we be fated to do
Nothing but brood on debt
Debt, Glorious debt, Glorious debt!
The Pre-Crisis Years:
Advanced Countries Except Canada Ramped Up Private Sector Indebtedness
Across 1997-2007, most advanced economies – such as the U.S., the U.K., Ireland, Spain, Italy, Portugal, Hungary, Greece, Denmark, Australia and New Zealand – significantly increased their levels of private non-financial sector credit (“private credit”) relative to GDP.  (Figure 1, data in light blue.) This leveraging-up of advanced economies occurred as many emerging Asian economies – such as Thailand, Malaysia, Indonesia and Singapore – were deleveraging in the aftermath of the 1997-98 Asian financial crisis.
Canada stood out among advanced countries in that it did not significantly ramp up private sector indebtedness during this period, which culminated in the 2007-08 global financial crisis. Instead, Canada’s private credit remained relatively steady at around 150% of GDP from the early 1990s until about 2005. (That’s about the same level as the U.S., Japan and the Euro-area have reached today after many years of deleveraging.)
The Post-Crisis Years:
Canada Joins Hong Kong and China in Ramping Up Private Sector Indebtedness
Since 2007, however, Canada has seen the world’s 5th largest increase in private credit relative to GDP (Figure 1, data in dark blue). Canada joins Hong Kong, China, Luxembourg and Singapore as one of the top countries in this leverage cycle. By contrast, many advanced countries have been deleveraging in the wake of the global financial crisis.
Private non-financial sector credit to GDP ratio, percentage point change
|Source: BIS Statistics|
Canada now ranks 10th in the world in terms of the level of private credit to GDP, alongside China, at around 210% of GDP (Figure 2). Regions with even higher private sector indebtedness include Hong Kong, the Benelux and most Nordic countries of Europe, Switzerland and Ireland.
Canada’s private sector indebtedness outranks Australia (about 200% of GDP), France (about 190%), New Zealand and the U.K. (about 170%), Japan and the Euro area (about 160%), and the U.S. (about 150%). Canada’s private debt to GDP ratio is almost double that of Greece (about 120%) and Italy and Germany (about 110%).
Ratio of private non-financial-sector credit to GDP (%), as of 2017
|Source: BIS Statistics|
Global financial conditions are now tightening as central banks try to wean their economies off high-octane monetary stimulus by raising interest rates from ultra-low levels and tapering their asset purchases.
As the cost of borrowing inches higher, Canadians might not find debt so glorious in the years ahead.
 Muellbauer, St-Amant and Williams (2017, 1), in their time series econometric study of Canadian household credit conditions, found that, “Much of the rise in house prices and debt since the late-1990s can be explained by cheaper and easier access to mortgage credit.”
 The “private non-financial” sector includes non-financial corporations (both privately-owned and publicly-owned), households and non-profit institutions serving households as defined in the System of National Accounts. See BIS 2018.
 In the U.S., which became the epicentre of the global financial crisis, the ratio of private credit to GDP peaked at 168% in 2008, compared to an average ratio of 120% from the mid-1980s until the late-1990s.