Here’s another economics lesson from COVID-19’s school of hard knocks. File it under dangerous debt accumulation.
That danger has been masked for years by relatively buoyant economic times and low-interest-rate regimes, but when a hammer blow out of left field from a devastating force like a global pandemic hits economies, businesses and consumers as hard as COVID-19 has, debt accumulation becomes a life-and-death factor for many businesses. The daily roll call of job losses and business closures and bleak fiscal outlooks provides a disturbing picture of how the pandemic is inflicting financial damage at every level of the economy.
The depth of debt accumulation prior to 2020’s detonation of the pandemic business bomb will determine how deep and how long lasting the damage will be for governments, businesses and consumers.
Data from consumer credit reporting agency TransUnion for 2019’s fourth quarter already showed the number of Canadian consumers with seriously delinquent credit payments up 37 basis points year-on-year to 5.61%. Insolvency rates were up 11.5%.
Since then the coronavirus pandemic has ripped quantitative-easing bubble wrap from around all businesses and consumers gambling on continuing to carry heavy debt loads.
For many it will prove fatal to their businesses; for others it will dramatically lengthen post-pandemic recovery time.
The federal Liberal government’s actions to provide support to businesses and workers have been swift and decisive.
But the long-term costs of those actions have yet to be accurately calculated. Bank on it being far more than originally estimated; bank, too, on it being a heavy long-term albatross around the necks of Canadian taxpayers already being saddled with debt from a federal government that, as the Fraser Institute recently documented, has recorded the highest per-person spending of any Canadian federal government.
Saving for a rainy day is all but a lost art in Canada.
COVID-19 has underscored why the country desperately needs to rediscover it once the worst of the pandemic is done.
