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12/03/2018 12:52 EST | Updated 12/03/2018 13:04 EST

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Consumers are taking on debt faster than they're paying it off, and that "can't be sustained forever."

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Some rather unpleasant warning signs have appeared in Canada's economy recently, and one that has captured the attention of many experts is the savings rate the percentage of income that Canadians manage to save.

Over the past year, the savings rate has dropped to its lowest level since 2005, averaging just 1.4 per cent of Canadians' incomes, according to revised data released by Statistics Canada on Friday.

"Canadians dipped into their nest eggs to compensate for weak real disposable incomes," National Bank Financial economist Krishen Rangasamy wrote in a client note.

"That does not bode well for consumption going forward."

Earlier on HuffPost: Bank of Canada's heat maps show extreme debt levels spreading across Canada (story continues below)

A falling savings rate can be a problem for the economy, because it suggests consumers are running out of steam.

The lack of a financial cushion in hard times means that "households are even more vulnerable to higher interest rate(s) than we had previously thought," wrote Stephen Brown, senior Canada economist at Capital Economics, which has taken a bearish view of the economy in recent years.

"In that environment, the Bank of Canada's plan to raise interest rates repeatedly could be a serious policy mistake."

The Bank of Canada will make an interest rate announcement on Wednesday. Most observers expect Governor Stephen Poloz to stand pat this time around, with the next interest rate hike coming in January.

Earlier on HuffPost Canada:


But following some disappointing numbers on Canadian economic growth in the third quarter, many observers have started questioning whether that rate hike will still happen.

Brown noted that Canadians are taking on debt faster than they are paying it off. "Although this situation has been sustained for 16 years ... it can't be sustained forever," he wrote in a client note Monday.

Savings tumbled as debt grew

This is not a new phenomenon. Canada's savings rate as well as the savings rates in the U.S. and other developed countries has been falling for decades.

Economists don't really know why. One explanation is that the population is aging, and retired people draw down their savings rather than building them up.

However, that alone couldn't explain the enormous drop in Canadians' savings rate, from 12 to 15 per cent in the early 1990s to below 2 per cent today. Nor could it explain why much of the drop took place in the 1990s, when the boomers were still in prime working age.

HuffPost Canada
The percentage of income Canadians save has dropped precipitously in recent decades.

HuffPost Canada
The ratio of debt to income among Canadian households has exploded in recent decades.

Another explanation is that decades of declining interest rates have made it easier to borrow, and made people less concerned about how they'll finance their consumption in hard times. Rather than saving up for the things we want, we just buy them on credit.

But this means households are more dependent on interest rates than they were before.

Given the weakness in consumers' finances, Brown predicted that the Bank of Canada's interest rate will peak at a lower rate than previously expected, and "the Bank will ultimately be forced to reverse course next year" and start reducing rates.

For now, that's not the majority view. Many analysts continue to expect the Bank of Canada to keep raising interest rates next year, as it continues to worry about inflationary pressures in an economy that showed signs of overheating until recently.