08:07 AM EDT, 09/10/2024 (MT Newswires) -- Canada is in a debt crisis -- not necessarily in the government sector -- but for whatever reason, someone at the helm thought it prudent to allow the household sector to run up an extraordinarily leveraged balance sheet, said Rosenberg Research.

Total debt-to-income sits at 177%, which is double the government sector debt load and nearly 40 percentage points above both the historical norm and the peak of the credit market bubble in the United States in 2006-2007, noted Rosenberg Research.

With the Bank of Canada's prior aggressive tightening cycle bumping against this debt burden, Canadians, in the aggregate, are shelling out 15 cents in debt service for every after-tax dollar earned, which is a level that presaged each of the past four official recessions.

Canada has concentrated so much on government that the ignored productive private sector capital stock has completely stagnated over the past decade. As a consequence, there's a crisis in Canada of capital investment and productivity which is why the country has been so reliant on immigration, but even here, the population boom is lagging well behind the economy's output and income-generating capacity, stated Rosenberg.

Canada has a crisis on household balance sheets and it's going to take a lot of time and a whole lot of BoC easing to prevent a delinquency/default cycle from coming to the fore, added Rosenberg. Consumer insolvencies in July were already 24% above year-ago levels and such proposals have shot up 23%. As for the business sector, failures have soared 37% year over year.

To even be debating whether Canada is in recession or not is laughable, it said.

On a more positive note, Canada's central bank is late, but it now realizes that it is behind the curve and is addressing the situation, although not that aggressively, according to Rosenberg.

Rosenberg believes that (i) there is no chance Canada ends this cycle higher than the mid-point estimate of neutral, which now sits at 2.75%, (ii) the historical record shows that the appropriate policy rate for an economy in an excess-supply backdrop is 2%, and (iii) going even further, the "real" or inflation-adjusted policy rate has averaged less than 1%.

If this seems a radical forecast, the policy rate in Canada got as low as 2% or lower in each of the past four BoC easing cycles over the past quarter-century, recalled Rosenberg.