A lot gets made of soaring U.S. government debt levels, while Canadian households are notorious for the debt loads they’re carrying, but when it comes to the total amount of debt outstanding relative to the size of the economy, Canada and the U.S. are eerily similar.
The two countries just took very different paths to get here. Household, corporate and government debt is now equal to 335 per cent of GDP in the U.S., and 341 per cent in Canada.
That puts the U.S. slightly ahead of where it was before the pandemic, thanks to increases in government debt, while Canada has dipped from its pre-COVID-19 level because of a drop in corporate debt, according to a note by Bank of Montreal chief economist Doug Porter.
What sets the countries apart is the trajectory. Debt levels in the U.S. surged in the leadup to the 2008-09 financial crisis, as households borrowed massively because of that country’s housing bubble. That was followed by an extended period of U.S. deleveraging.
Canada, on the other hand, took what Mr. Porter called a “slower burn” approach that nevertheless saw debt levels surge after 2015 as real interest rates plunged.
What’s unclear is how sustainable this debt picture is. Two factors are helping.
“First, real [interest] rates are still half the level of the 1990s, even with the recent rise,” he wrote. “Second, as we always say, every dollar of debt is someone else’s dollar of asset.”
Decoder is a weekly feature that unpacks an important economic chart.
Jason Kirby