According to a new report from investment bank Morgan Stanley, Canada is the second most at risk country due to high household debt levels.
Morgan Stanley’s annual "Household Deleveraging Risk Indicator" found that Australia’s economy is most at risk within the developed world from household debt levels due to a combination of weakening house prices and potential tax changes. However, the report noted that Canada is the second most at risk country in the world. Sweden and Norway also have high household debt levels and are at risk, according to Morgan Stanley.
"These economies now face a crucial juncture as housing markets weaken, forcing a reappraisal of leverage and wealth, and global financial conditions tighten, increasing the consumption drag from debt service and rising savings," said Morgan Stanley in its report.
Morgan Stanley said that households in the U.S., Japan, European Union and United Kingdom have cut debt levels since the global financial crisis of 2008-09. But it says that record debt levels have built-up in Australia, Canada, New Zealand, Sweden and Switzerland.
In the case of Canada, the risks come from a combination of falling house prices, rising interest rates and weaker credit growth. Morgan Stanley estimates that household debt in the 10 largest developed economies has surged to 160% of income from 98% over the past two decades. That could have consequences for monetary policy going forward, said the bank.
