Recessions do not just happen. They are made. They spring from the accumulation of a long-period of underlying contributing economic factors, but then along comes a trigger - or two if you are really unlucky - and before you know it there is a recession underway. We have had a particularly long stretch of economic prosperity in Canada and indeed the United States and the world that has seen rising employment. However, the last few years have seen turmoil on the trade front and still high public and personal debt levels which have been sustainable only because of continuing record low interest rates.
Despite the threat of rising interest rates, they have remained low and this appears to have encouraged consumers to continue taking on personal debt. Indeed, consumers in Canada have been maintaining their standard of living by extending their credit not just for mortgages but also for all kinds of other things - if there is an expenditure, there is a monthly payment plan for it. And of course, governments have also enjoyed the bounty of low rates by taking on more debt despite the good economic times.
Now, debt is a tool and Canadians have also been managing to build equity given the rise in housing prices but the question is if there is simply too much debt. This piece in the
Globe and Mail points out debt situations that apparently are common in a lot of Canadian suburban areas though the more interesting question is really how a 29 year old making $30,000 a year is able to obtain a $700,000 mortgage. When and if the reckoning comes, Canadian banks will have a lot of explaining to do - especially to the savers who been given low returns and have been financing this debt blowout for the last decade.
Responsible consumers who have taken on debt have nothing to worry about but many consumers have simply taken advantage of really cheap money to leverage themselves to the point where they have very little room to maneuver. Apparently, nearly 15 percent of household disposable income is going to service household debt. A loss of employment or an increase in costs - from say a rise in interest rates - will very quickly lead to unsustainable finances for a lot of Canadian households. Fortunately, interest rates do not look like they are going anywhere soon and with a federal election underway in Canada now - and more importantly - an American election in 2020, one expects government policy to continue favoring low interest rates.
However, the events in Saudi Arabia over the weekend revealed a new trigger of financial stress - rising oil and gasoline prices. All those suburban households around the world dependent on relatively cheap gasoline for their commute to work and home could face a new source of financial stress if gasoline prices go up. dramatically Sure, its not a rise in interest rates but it will operate the same way - it will take money away from other things like food and groceries, lead to a rise in the cost of living and divert money away from debt service.
The ten percent spike in oil prices after the attack on Saudi oil facilities is unlikely to be sustained according to venerable sources like the
New York Times but then who really knows? The key here is uncertainty about what comes next. Can any damage be repaired quickly? Will there be other attacks? How was such an attack even possible given the level of security and the amount of military hardware around to ensure that such things do not happen? This uncertainty is the key issue and should there be another supply disruption, you can count on a more sustained price spike and economic fallout for consumers. If one especially looks at how North American drivers have been shifting to driving larger shiny new trucks - financed by debt of course - one can see a pretty severe impact.
However, it looks like for now that oil supplies are still abundant as the disruption occurred during a period of relative surplus. And of course, there is the U.S. strategic oil reserve. Nonetheless, watchful waiting is the word.
