Canadian household financial stress remains elevated but appears to be stabilizing, as lower debt-servicing costs, slower borrowing, moderating arrears, and manageable mortgage renewals are easing pressure despite a soft labor market, according to Bank of Montreal Capital Markets (BMO).
Consumer spending should benefit, though households remain sensitive to slower growth and higher interest rates, wrote BMO Senior Economist Sal Guatieri in a Friday note.
Canadian households are facing ongoing financial pressures, with many cutting back on travel, dining, and entertainment, the bank said, pointing to a survey conducted by insolvency firm MNP Limited. Sentiment has improved from the US trade war period but remains below normal, as fuel costs, economic uncertainty and a weak labor market weigh on confidence.
While first-quarter consumer spending grew 2.0% year over year, recent retail data suggest a weaker second quarter, said BMO. Household debt remains elevated but has stabilized, with slower borrowing, weaker credit card growth and lower debt-service costs helping ease financial strain.
Mortgage arrears have risen slightly but remain below historical levels, according to the bank. Despite renewal concerns, defaults have remained contained, supported by stress tests, income growth, principal repayments and longer amortization periods. Renewals may weigh on spending and arrears over the coming year, but the impact is expected to remain manageable.
Higher home prices provide some support, though risks remain concentrated among highly leveraged borrowers in Ontario and British Columbia, added BMO.