Consumer debt growth down 30% in Q2 in biggest post-recession slowdown

TORONTO – Consumer debt growth was about 30 per cent lower in the second quarter than a year earlier — the biggest slowdown since before the recession, according to a consumer credit study released Thursday.

Equifax Canada’s quarterly consumer credit trends report found that consumer indebtedness, excluding mortgage debt, grew 3.1 per cent year-over-year in the second quarter, down from 4.4 per cent in the same period of 2011.

The study also found that high-interest credit card debt fell by 3.8 in the quarter and consumer bankruptcies were down 4.5 per cent from a year earlier. Meanwhile, bank loans and lines of credit showed very moderate growth compared to a year ago.

And while consumers continued to take on debt, it is encouraging that the rate of acceleration is moderating significantly, said Nadim Abdo, vice-president of consulting and analytical services at Equifax Canada.

“For the last couple of years we have seen almost double digit growth in some cases, it slowed down a bit last year, but we have never seen it slow down as much as we have (in the second quarter) probably for the past five or six years,” he said.

The biggest increase in outstanding balances was for non-bank auto finance loans and leases, which grew by eight per cent from the second quarter of 2011.

Average bank term loans grew by 3.4 per cent, while lines of credit were up by just 0.5 per cent.

The 3.1 per cent rate of debt growth was also an improvement from the first quarter of this year, when non-mortgage debt grew by 3.4 per cent.

Most of the growth appeared to come from people’s existing credit rather than new accounts, another sign of improvement, Abdo added.

The agency’s credit seeking index — which measures the velocity at which consumers are seeking new credit — suggested that consumer demand for new credit is six per cent lower than it was before the 2008 financial crisis.

“We remain to be in a very low interest rate environment, so you might expect people to borrow more but maybe they are listening to the Minister of Finance and other people who are encouraging them to deleverage,” Abdo said.

“We are seeing —not deleveraging — but certainly a significant slowdown in the growth rate of credit this quarter.”

Consumers have taken advantage of ultra low interest rates since the recession to heap on low-cost debt. The Bank of Canada decided earlier this week to keep its overnight lending rate — which affects prime rates at banks — at one per cent to stimulate a still fragile economy.

However, Mark Carney, the central bank governor has issued repeated warnings that the plan comes with a consequence that could spell economic trouble in times ahead. The most overstretched consumers could find themselves sunk if interest rates rise.

With household debt at an all-time high above 150 per cent of income, the Bank of Canada has declared it the number one domestic risk to the economy.

Carney said Wednesday that government stimulus and household consumption backed by low interest rates had sustained the recovery so far, but there are limits to that approach.

“We’re seeing the limits on the household debt side which is why various measures are being taken,” he said, referring to the most recent move toward tighter mortgage and lending rules.