This week, a new report from the Bank of International Settlements (BIS) placed Canada’s household debt level in a dangerous “red zone.” But according to one economist, things aren’t as bad as they might first appear.

“According to the BIS, Canada stands out with its credit-to-GDP gap flashing red, ie, an early warning indicator for stress in domestic banking systems,” writes National Bank chief economist Stefane Marion, in a recent note. “According to a recent paper by the Bank of Canada, the BIS warnings on Canada should be taken with a grain of salt.”

One grain of salt worth considering? Marion writes that it’s worth noting that private credit in Canada includes Crown corporations, entities that are backed by the creditworthiness of federal or provincial governments. The Bank of Canada also argues that lending between affiliated companies — which are not extended directly by financial institutions — should be excluded.

“These adjustments alone reduce the Canadian credit-to-GDP ratio from 213 per cent to a much less threatening 170 per cent,” writes Marion.

He notes that the BIS methodology also does not control for demographics and the structure of labour markets, which can be critical when assessing the longer-term sustainability of a country’s financial system.

“For example, employment surged 2.3 per cent in 2017 in Canada, the largest increase in fifteen years,” he writes. “As the above chart shows, the employment-to-population stands at 62 per cent in our country, the second highest in the OECD.”

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