Opinion » Pique'n Yer Interest

A recovery in 2012?



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In Canada, we don't have the same subprime mortgage situation as the U.S., but we do have home prices that are well out of whack with inflation and tens of thousands of families that would be severely challenged if the Bank of Canada interest rate climbed by as little as a point. The golden rule is that housing costs should never exceed a third of your overall earnings, but in Canada the average ratio is already over 40 per cent as many people purchased homes at prices they could not really afford — encouraged by low interest rates that will one day go up.

Household debt is through the roof, with the average family owning 150.8 per cent more than they earn annually. Back in February 2011, the average household debt load broke $100,000 for the first time, including mortgages, car financing, credit card loads, lines of credit, etc. There are 74 million credit cards out there, more than two for every man, woman and child in this country.

Nationally, we are taking the issue seriously. A recent poll by CIBC found that paying down debt was the economic priority for a growing number of people (17 per cent in 2011, compared to 14 per cent in 2010), as well as budgeting (14 per cent) and retirement planning (11 per cent). While that's a wise choice, it's also not particularly good for the economy— while personal saving rates do need to increase significantly, the economy depends on spending to keep the gears turning.

Ideally, it should always be a balance where people save a little and splurge a little, but historically we have a tendency to believe that the good times, such as they were, will never end. Everyone is supposed to have enough in the bank to survive for six months if they lose their job, but studies suggest that most Canadians are a paycheque or two away from disaster.

Most forecasters believe that Canada and the U.S. will see some economic growth in 2012, roughly 2.3 per cent for Canada and just over three per cent for the U.S. It could be the start of a recovery, or an overstatement like other projections made in recent years. In the meantime, Canadians need to remember that the crisis isn't over yet. Be prepared — even if the economy takes off, the worst that could happen by taking a cautious approach is to finish 2012 with a little more money in the bank.