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Normal economic cycles can hurt the individual

Normal economic cycles can hurt the individual

February 14, 2022

Economic activity in Canada ebbs and flows, writes Peter Watson. 

We have prosperity, then things slow down and we can have a recession. Then a recovery.

The goal of the Bank of Canada is to manage our economy, provide slow and steady growth and hopefully allow us all to prosper.

That’s good for the country, but not necessarily good for individuals.

When the economy slows, one strategy employed by the Bank of Canada is to lower interest rates. The cheaper interest rates are, the more individuals will borrow and spend.

The Bank of Canada needs to entice consumer spending to increase economic activity.

Often there is a warning not to overspend and accumulate excessive household debt. But lowering interest rates was meant to encourage spending.

Economic success does eventually happen. Business activity picks up, people are employed, and the government collects taxes as a result.

Economic success for Canada does not necessarily translate to those consumers who could not resist low interest rates and now find themselves with too much personal debt.

Eventually the economy will be clipping along at a fast pace and need to be slowed. That will result in the Bank of Canada increasing interest rates.

Some individuals with too much debt will not be able to afford higher interest rate payments. Those that overspent and helped restart the economy could face financial hardship.

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Watson provides wealth management services through Watson Investments. He can be reached at www.watsoninvestments.com.