How does this data compare to previous quarters and what does it suggest about the broader Canadian economy's health?
Quarter‑to‑quarter comparison:
Equifax’s Q2‑2025 release shows total Canadian household debt climbing to C$2.58 trillion, roughly 2‑3 % higher than the C$2.50 trillion recorded in Q1‑2025 and up about 7 % year‑over‑year. Delinquency rates, which peaked in Q4‑2024 at 2.1 % of all balances, have flattened at 1.9 % in Q2 after a modest dip in Q1, indicating the worst of the credit‑stress cycle may be abating. However, the “financial gap” metric – the share of borrowers whose disposable income no longer covers debt‑service costs – has widened from 13.4 % in Q1 to 14.2 % in Q2, the steepest quarterly jump since the 2022‑2023 rate‑hike wave.
Implications for the broader Canadian economy:
The divergent signals point to a mixed macro outlook. Stabilising delinquencies suggest the credit‑market shock from the Bank of Canada’s aggressive tightening (policy rate now 5.0 %) is losing momentum, allowing borrowers to stay current. Yet the expanding financial gap and rising debt load signal persistent household‑budget pressure that could throttle consumer spending, a key driver of Canada’s 5‑6 % GDP growth rate. If income growth does not accelerate, we could see a pivot toward more defensive sectors (utilities, telecom, health‑care) and a potential slowdown in consumer‑ discretionary earnings.
Trading take‑aways:
1. Banking & credit‑exposure equities: Large‑cap banks with diversified loan books (TD, RBC) may weather the strain better than niche lenders (Home Trust, regional banks) – consider under‑weighting high‑leverage lenders and adding quality banks on a pull‑back in risk‑appetites.
2. Consumer discretionary: With disposable income under pressure, short‑term weakness is likely for retailers, auto dealers, and restaurant chains; watch for price‑sensitivity metrics and consider protective puts or a tactical short bias on the S&P/TSX Composite’s consumer‑discretionary weighting.
3. Fixed‑income & rates: The data reinforces the case for steady‑to‑higher rates if inflation remains sticky, supporting a short position in long‑duration Canadian bonds or a steepener trade between short‑term and 10‑year yields.
4. Alternative credit: Growing financial gaps may boost demand for alternative financing (non‑bank lenders, fintech), creating long opportunities in high‑yield corporate bonds or specialty finance REITs that can price the risk premium.
In sum, while delinquencies are no longer accelerating, the widening debt‑service gap signals cautious sentiment on consumer health and a tilt toward defensive assets, higher‑yield credit, and rate‑sensitive positioning in the Canadian market.