According to the Conference Board of Canada, rising household debt will limit consumer spending growth in 2017. This lesson plan examines why household debt has risen to such high levels and the potential effect a reduction in consumer spending growth could have on the Canadian economy.
Appropriate Subject Area(s):
Economics, financial literacy
Key Questions to Explore:
- Why is household debt rising?
- What steps can be taken to reduce Canadian household debt?
- What effects will a decrease in consumer spending have on the Canadian economy?
- Why effects would the new mortgage rules have on the housing market? What effects would a slowdown in the housing market have on Canada’s GDP in 2017?
- Why does a depreciating Canadian dollar make Canadian exports more attractive?
GDP, consumer spending, household debt.
- GDP: Gross Domestic Product (GDP) is the total unduplicated value of the goods and services produced in the economic territory of a country or region during a given period. GDP provides a wealth of information. This aggregate is often referred to as the economic report card of a country. The level of GDP reveals information about the size of an economy while the change in GDP from one period to another indicates whether the economy is expanding or contracting.
- Consumer spending: this is another term for voluntary private consumption, or an exchange of money for goods and services. Contemporary measures of consumer spending include all private purchases of durable goods, nondurables and services. In a purely free market, the aggregate level of private consumer spending in an economy is necessarily equal to the total market value of economic output.
- Household Debt: this is defined as mortgage debt on all residences and real estate, and consumer debt (including debt outstanding on credit cards, personal and home equity lines of credit, secured and unsecured loans from banks and other institutions, and unpaid bills).
- Copies of the article plus links to these associated articles:
Introduction to lesson and task:
In 2016, Canada’s economy grew by 1.3%. A significant portion of this growth was due to consumer spending, which was largely supported by household debt.
Ultra-low borrowing rates and rising housing prices have provided an environment conducive for Canadian households to increase their debt load. Household debt certainly fuelled a significant portion of consumer spending, which accounts for 2/3 of Canadian economic activity and roughly 62% of GDP growth in 2016.
As at the fourth quarter of 2016, the household debt to disposable income ratio was 167.3%. That means that, on average, Canadian households owed $1.67 for each dollar of disposable income they earned. This high level of household indebtedness leaves households vulnerable to financial shocks like a rise in interest rates. (Note: The total outstanding Canadian household debt as at 2016 was $2.029 trillion.)
The regulatory measures the Canadian government introduced in 2016 were meant to ensure Canadians do not take on bigger mortgages than they can afford. Since a significant portion of household debt is due to mortgage loans, these new regulations could have a substantial impact on reducing household debt levels.
As households adjust to the new housing regulations and potentially higher cost of servicing their debts, the ability of consumers to continue to drive growth is likely to slow down in 2017. This means that GDP growth must come from other sources like business investments, exports and government spending.
Action (lesson plan and task):
- Ask your students to explain why household debts are rising.
- Ask your students to explain the negative effects of rising household debt.
- Ask your students to explain why we are likely to see a reduction in consumer spending in 2017.
- Ask your students to explain the effects of a reduction in consumer spending on Canada’s GDP.
- Ask your students to explain why Newfoundland is expected to see a remarkable turnaround in 2018. (Hint: Newfoundland’s economy relies heavily on oil production. As oil prices continue to rise, this will have a positive effect on Newfoundland’s economy. In addition, the fishing industry is also showing promising signs.)
- Ask your students to explain why we are likely to see slower economic growth in British Columbia in 2017. (Hint: We are likely to see slower economic growth in BC due to a cooling housing market and trade disputes with the U.S. regarding softwood lumber exports, which accounted for $4.6-billion worth of exports to the United States in 2017.)
- Ask your students to explain why we are likely to see slower economic growth in Ontario in 2017. (Hint: We are likely to see slower economic growth in Ontario due to a moderation in housing market activity and increased uncertainty with respect to trade with the United States.)(
- Ask your students to explain why we are likely to see higher economic growth in Alberta in 2017. (Hint: We are likely to see higher real GDP growth in Alberta due to rising oil prices and rising capital investments in the oil and gas extraction industry.)
- Ask your student to state the factors that will lead to a 1.9% real GDP growth in 2017.
- Ask your students to explain why Quebec’s aging population could adversely affect its growth potential.
Consolidation of Learning:
- Ask your students to state the potential effects a rise in interest rates will have on consumer spending.
- After completing this lesson plan students should understand the effects a reduction in consumer spending will have on the real GDP growth in 2017.
- Ask your students to research the new mortgage rules and state the possible effects these new rules could have on the housing market.