Sunday, January 25, 2009

Low debt-load will help us weather recession

It can't save us from recession, but it will certainly reduce the pain. Canada's low debt burden - among governments, businesses and households alike - gives the country a crucial advantage as it heads into what threatens to be a long haul.

Backed up by stability in the banking system that has become the envy of many countries, the Canadian advantage is solid enough that even the global recession and financial crisis can't destroy it.

"The advantage is fundamental. It's not cyclical," said Sherry Cooper, chief economist at BMO Nesbitt Burns. "Nobody can take away the fact that Canadians are far less burdened,".

At the heart of the global recession is the fact that the U.S. government, financial institutions, households and companies lived way beyond their means for a long time. The effects of too much debt are being felt everywhere.

But since Canada's governments, financial institutions, households and companies aren't facing the same high debt problems, the country doesn't have to fix those problems to muddle through.

"So much of what is happening in the United States is because of the credit freeze. There's no comparison here. Canada is in a far better condition," Ms. Cooper said.

Bike courier André Régimbald can feel it. He navigates Ottawa's icy downtown streets daily, even when it's -30, and embraces the challenge with a thick balaclava and a grin.

He's confident - even as local messenger firms duke it out for dwindling business and he doubts some of his newer colleagues will make it through the winter with their jobs intact - that his salary will continue to flow as usual.

"It's not really bothering me," said Mr. Régimbald, 47. He's pretty sure he won't lose his job, and if he does, he knows how to find another one.

Canada is in better economic shape to handle the global recession than most other countries, and compared with previous recessions. Like the courier smiling thinly, through a missing front tooth, the hardy Canadian economy is well prepared to tough it out, even as the harsh winter of the U.S. recession sets in.

The Canadian economy can't go so far as to claim it's not being "bothered" by the global recession. After all, it is contracting, too. The pain is mounting in many industries, and the ranks of the unemployed are growing. Recovery is a long way off.

But Canada's reduced exposure to the unseemly debt loads at the heart of the crisis will stand us in good stead, economists say.

The most obvious Canadian advantage is government debt load. After fighting down the deficit in the 1990s, the federal government has been able to pay off more than $100-billion in debt in the past decade, and most provinces have vastly improved their books as well.

Not so in the rest of the world. The U.S. deficit has ballooned and Japan's is enormous. While most European countries have kept their debts under control, Canada's total debt burden is still lower. As Ottawa and the provinces ready themselves to spend billions in an attempt to mitigate the recession, Canada can well afford to do so.

"The debt [burden] gives us lots of room to manoeuvre. This is the time to raise it," said Andrew Sharpe, executive director of the Ottawa-based Centre for the Study of Living Standards. "We've built up this big advantage, so let's use it. But wisely.

"The Canadian banking sector has also gained international recognition for its ingrained conservatism. While major banks around the world have toppled and have required government bailouts, Canadian banks remain somewhat profitable and well capitalized. Unlike their global competitors, they are still lending, and are able to raise money in financial markets, albeit at steep prices.

The corporate sector, as a whole, has been equally thrifty and conservative. Debt levels are low, and companies generally have high cash balances at the ready - useful for plugging holes due to sudden collapses in revenue that could well hit in the next few quarters.

As corporate income surged over the past few years, economists were worried that Canadian companies weren't putting their newfound bounty to good use, by leveraging it for further expansion. Now, the companies' tight fists seem to be paying off.

The lack of available credit in the United States is forcing debt-addicted companies to de-leverage, pummelling stocks and causing massive layoffs. In Canada, companies aren't as needy of credit. While stocks are plunging here and layoffs have begun, the carnage is not as deep or widespread.

Canadian consumers have shown a similar conservative attitude toward debt. While U.S. homeowners were using their houses as ABMs, and buying homes with spurious loans, Canada also experienced a housing boom and embraced the U.S. practice of borrowing against our houses to finance consumption.

But mortgages here were not nearly as high risk. Housing prices are now falling, but not to the extent as in the United States or Britain."We are leveraged, but they are more leveraged," said Benjamin Tal, senior economist at CIBC World Markets. "If you want to feel good about yourself, just look south of the border.

"There, falling home prices and the rising cost of credit mean many homeowners' mortgages are now bigger than the value of their homes. That hasn't happened in Canada. Plus, Canadians are generally not as exposed to the stock market as in other industrialized countries, so the negative wealth effect that many Americans are experiencing right now is not as severe in Canada.

But there's a serious crack in the tough Canadian outer shell. The savings that Canadians have used in the past as protection against hard times are no longer there. With the savings rate hovering near zero over the past few years, that buffer is gone, Mr. Tal says.

Since consumer debt levels have risen, savings have dwindled, and credit is harder to get, "we are clearly as vulnerable, in terms of the position of the economy, as we were in [the last recession in] 1991.

"Plus, the safety net for those vulnerable people is not nearly as strong as it used to be.

Bike courier Mr. Régimbald is a case in point. He has no savings. And while he's certain he won't spend any time being unemployed, if he's wrong, he's not covered by employment insurance.

"The changes to employment insurance over the years have just been Draconian," said Ken Battle, president of the Ottawa-based Caledon Institute for Social Policy. "It's been reduced to rubble."

Only 43 per cent of unemployed people were covered by EI in 2007, compared with about 80 per cent in the 1990s, he said. Regional variations are striking, with only 32 per cent of Ontario's unemployed people receiving coverage. Women are less likely to be covered than men.

And the backup plan for people with little income - provincial welfare programs - is notoriously meagre and archaic, Mr. Battle added.

Still, the federal government has been made aware of the shortcomings of the EI program, and is poised to make changes in next week's budget.

G7 debt to GDP ratios

Canada has a much lower government debt per capita than other G7 countries


Canada: 22%
Britain: 33%
France: 36%
Germany: 43%
U.S.: 46%
Italy: 87%
Japan: 88%


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