June 15, 2012 / 12:47 PM / in 5 years

Canada household debt at record as factory sales lag

OTTAWA (Reuters) - Despite warnings from the central bank, Canadians are continuing to pile up debt at a record pace, figures showed on Friday, while manufacturing data signaled softness in the economy.

A report that showed a decline in existing-home sales in May added a further dimension to the Canadian economic picture, showing a cooling of what has been the economy’s hottest sector since the 2008-09 financial crisis.

On household debt: Statistics Canada reported that the ratio of household debt to income rose in the first quarter to a record 152.0 percent from 150.6 percent in the fourth quarter of 2011.

The Bank of Canada said on Thursday that the high household-debt level continued to present the greatest danger to financial stability in Canada.

The bank said the fourth-quarter ratio of household debt to income was already higher than in the United States and Britain, and it predicted further rises in the Canadian ratio over the medium term.

On factory sales: the statistics agency reported a 0.8 percent decline in manufacturing sales in April from March.

Much of the drop was explained by fluctuations in the volatile aerospace industry and by temporary oil refinery shutdowns, but it still marked a weak start to the second quarter at a time when Europe’s debt problems are shaking the global economy.

On home resales: The Canadian Real Estate Association (CREA) said on Friday that sales in May slowed by 3.1 percent from April and that the average price fell on a year-on-year basis for only the second time in the past 1-1/2 years, retreating 0.3 percent to C$375,605 ($368,240).

The main factor was a sharp decline in British Columbia, where the once-hot Vancouver market has begun to cool.

However, CREA raised its sales forecasts for the year, saying that low interest rates continue to sustain an active housing market, particularly in the Prairie provinces of Alberta and Saskatchewan.

Of main concern to the Bank of Canada is household debt. It rose by 0.9 percent in the first quarter, almost all from mortgages, compared with a 1.3 percent rise in the fourth quarter of 2011 and a 1.8 percent increase in the second.

The trend is lower but household disposable income grew by a smaller 0.3 percent in the first quarter and therefore the ratio of debt to income kept rising.

Royal Bank of Canada, the country’s biggest bank, said the debt levels should not be of great immediate concern.

“This growth in borrowing is not because any of us have massively relaxed our standards and started lending to people who can’t afford it,” said Richard Goyder, vice president of personal lending at RBC. “The ability of Canadians to service the debt they’re carrying remains strong.”

He pointed out that the ratio of household debt to net worth was stable, actually declining slightly in the first quarter as stock markets rose.

Friday’s manufacturing data spurred concern about the economy’s strength in the second quarter.

“Today’s data raise some doubts that April gross domestic product will spring forward as robustly as some had been hoping,” said Emanuella Enenajor, economist at CIBC World Markets.

Data next week on wholesale and retail sales will help solidify the outlook for the month and quarter, she said.

The central bank has forecast real annualized growth of 2.5 percent in the second quarter.

The economy grew at a lackluster pace in the first quarter and jobs growth slowed markedly in May after two months of blockbuster gains. The near future may not look much stronger due to investor anxiety over Sunday’s Greek elections and persisting worry over European sovereign and bank debt.

The setback in manufacturing was the third fall in four months, and came on the heels of a 1.9 percent rise in March. The median forecast in a Reuters survey of analysts was for a 0.3 percent rise. None forecast a decline of more than 0.6 percent.

($1=$1.02 Canadian)

Additional reporting by Cameron French in Toronto and Louise Egan in Ottawa; Editing by Peter Galloway

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