Household credit continues to grow to record levels, but TD Economics says that there are signs that this debt accumulation is slowing, and that business investment is picking up.

In a research note, TD says that the Bank of Canada’s financial statistics for chartered banks in September shows continued growth in household credit, up 0.8% on a month-over-month basis, and up by 8.3% on a year-over-year basis.

“Despite economy-wide debt levels hitting record highs as a percent of personal disposable income and a housing market correction, record low interest rates continue to be the driving factor behind Canadians’ thirst for debt,” TD says. “Ultimately, it is unlikely the case that Canadians can push much further given that interest rates will inevitably normalize, housing activity will continue to cool and asset appreciation will moderate in the coming months and years.”

Consumer credit grew by 0.9% in the month, led by gains of 2.9% and 0.7% in credit cards and lines of credit, respectively, TD said. Traditional mortgage credit grew by 0.2% in September, and securitized mortgage growth accelerated to 2.0% from 1.5% in August.

TD says it expects, “the cooling in the housing market that has characterized much of this year to eventually feed into mortgage credit growth, while consumer credit pulls back alongside overall spending.”

At the same time, business credit recorded flat growth in September after five consecutive months of declines, TD reports. “Lending to firms has not improved since the end of the recession and has consistently declined since January of last year,” it says. But, while business credit has yet to post a positive showing on a month-to-month basis, “every component is recording an improvement year-over-year, as the declines shrink,” it says.

“This continues to give us reason to be optimistic as TD Economics expects business investment to be a major driver of economic growth through the latter half of 2010 and into 2011,” it adds.

Second quarter real GDP data showed 29.7% annualized growth in machinery and equipment private investment, TD notes, adding that this is the highest pace of growth since 2005. “And though this robust pace is unlikely to be sustained, a large number of support factors are in place to help businesses to continue investing. A low interest rate environment, increased capital cost allowances, the HST implementation, continued improvement in corporate profits, and an elevated Canadian dollar should all prove to be supportive in the coming quarters,” it says.

Also, chartered bank deposits increased by 0.5% in September, TD reports, with growth on both the business and consumer sides. Chartered bank assets also grew, led by a 3.7% gain in Canadian securities, a 1.9% increase in short-term securities, and a 1.5% gain in longer-term government bond holdings.

“On a trend basis, chartered banks have been moving back into risk assets over the past six-12 months,” it says. “The flight-to-safety mentality that governed the latter half of 2008 and first half of 2009 is unwinding and the banks are moving away from Bank of Canada reserves and T-bills, towards longer-term government bonds and securities.” TD says that holdings of Canadian securities are up by more than 26% since the February 2009 low and it predicts that they “will likely continue to increase in the coming months as the flight-to-safety mentality continues to unwind on a trend basis.”

IE