David Rosenberg: Bank of Canada is going to have to cut rates sooner and harder than the Fed
There were several items that came out of the fourth-quarter national balance sheet data in Canada that leave us with a view that any positive “wealth effect” on spending is subsiding, that households are hunkering down and sharply reducing their appetite for debt, and that the Bank of Canada is going to end up having to cut rates sooner and harder than the United States Federal Reserve, with negative repercussions for the listless loonie.
While the stock market rally did manage to take the level of household net worth up 1.8 per cent quarter over quarter in the fourth quarter to $16.4 trillion, that merely retraced the third-quarter decline and leaves the level 2.3 per cent below the peak in the first quarter of 2022. The net-worth-to-disposable income ratio has also come down 135 percentage points from the late-2021 high and has dialled back close to where it was in the fourth quarter of 2020.
Equity ownership on the consumer balance sheet jumped 6.1 per cent to a record-high of $4.45 trillion, but eating into that was a surprising 1.8 per cent pullback in once-hot residential real estate, which has now deflated roughly eight per cent from the peak in the first quarter of 2022. Owners’ equity relative to the value of outstanding residential real estate has declined from 76.3 per cent in the second quarter of last year to 75.6 per cent in the third quarter and now to a three-year low of 75 per cent as of the fourth quarter.
On the liability side, the ratio of household debt to net worth dipped to 18 per cent from 18.2 per cent in the third quarter and is now below the pre-COVID-19 norm of 20 per cent. Total credit market debt relative to disposable income has declined in each of the past three quarters (from 182.3 per
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