It is an unfortunate rule that bad things also happen to optimistic people.
Just as new consumer confidence figures from the Conference Board of Canada show “a three month streak” of growing optimism, worrywarts from the commercial banks, the Canada Mortgage and Housing Corporation (CMHC) and the Bank of Canada, seem to be saying “not so fast.”
For Canadians trying to make sense of a series of frightening headlines, the difficult question is whether the warnings of potential economic turbulence are a signal to take the crash position or if we should trust our fellow travellers who seem to be taking the distressing indicators with a grain of salt.
Warnings come thick and fast
The gloomy warnings have been coming thick and fast. On Wednesday, the latest arrivals to the misery party were the Canadian commercial banks. BMO and Scotiabank were the first in what is likely to be a trend by all the Canadian banks to set aside extra hundreds of millions of dollars — more than a billion for BMO — to cover loans that borrowers cannot afford to pay back in full.
While those numbers are large, they are not as large as they would be if the taxpayer didn’t cover mortgage default losses. This week, however, the government agency that has to pay out if mortgage loans go bad had warnings of its own.
“We see early warning signs that more and more consumers are getting into financial difficulties,” said CMHC’s deputy chief economist Aled ab Iorwerth in a release on Tuesday.
Canadians in too much debt, CMHC says
Canada’s housing agency, the CMHC, is warning high household debt could put families and the whole economy at risk. Canadian household debt is higher than any other G7 nation.
Consumer debt in Canada has ballooned to more than 100 per cent of gross domestic product. That’s in contrast to similar countries, including Australia, New Zealand and the U.S. where after peaking, borrowing has begun to fall as a percentage of GDP.
In the past, Canadians have been reliable in paying back their loans, especially the mortgages that make up so much of our borrowing. But as longtime financial advisor and author Hilliard Macbeth has warned in the past, this time could be different.
There are signs ab Iorwerth and the CMHC could be coming around to a similar perspective. While current debt levels are not necessarily dangerous alone, ab Iorwerth said rising interest rates and the risk of a downturn that leads to unemployment could do serious damage to Canada’s economy.
Debt remains even after jobs are gone
“The burden of servicing debt does not go away when people lose their jobs; the burden continues until the debt is paid off,” said ab Iorwerth. “And when many households in an economy are heavily indebted, the situation can quickly deteriorate.”
That was also the message from the Bank of Canada’s annual Financial System Review (FSR) released last week.
As in previous years, senior deputy governor Carolyn Rogers added the proviso that “the FSR is not a forecast.” But that proviso itself deserves an addendum — in the past, bleak non-forecasts have hit very close to the mark.
A for sale sign is pictured in Auckland, New Zealand during their property boom which has been compared to Canada’s. But Canadian borrowing has continued to rise as a perentage of GDP, while it has been falling in comparable nations. (Fiona Goodall/Getty Images)
A year ago, the bank warned rising interests would hurt the fortunes of those who bought homes when interest rates were low and prices were high. In the prior FSR, the bank warned Canadians were accumulating too much mortgage debt.
Among this year’s warnings, there are concerns banks could face a shortage of cash reserves, if demand for money exceeded conventional sources, including the cash Canadians hold on deposit. Compounding the problem could be a global shortage of money, meaning that banks could have to restrict lending, even in emergencies.
“If global stresses were to return and persist, bank funding costs could rise beyond the higher levels intended by tighter monetary policy,” said Rogers.
Wishing for lower interest rates
While central bankers insist there are no plans to reduce interest rates, a shock to funding costs is the kind of drastic situation where it could happen.
“So far households are proving resilient despite the sharp increase in interest rates,” the Bank of Canada’s deputy governor told reporters last week. “However, in a severe and prolonged recession, mortgage defaults could rise leading to credit losses for lenders.”
Even if most Canadians have not listened to the dire warnings, the banks clearly have. Loan loss provisions, while they cut into profits and leave less cash for lending, are a boost for the economy in the longer term because they make banks safer. Setting aside money for defaults in advance, even if the funds are never needed, means banks would go into any crisis forearmed.
So, why, amidst all the warnings, is consumer confidence on the upswing, I asked Walter Bolduc, the economic forecaster who compiled the Conference Board report, in a phone interview on Wednesday.
Bolduc said the reason for the increase in confidence may be partly seasonal, but he also attributed it to the pause in the Bank of Canada’s increase in interest rates.
“You may have had people who were expecting [a rise in rates],” said Bolduc. “And then with the Bank of Canada holding the rates steady, they may have re-evaluated the situation.”
Fading optimism?
But according to Bolduc, that optimism which came with a new rise in real estate prices, may fade once people realize they too will likely be affected by rising mortgage costs. He said the Alberta forest fires could also cut into confidence.
The central bank warned last week that half of all mortgage holders will find their mortgage payments have risen by the end of 2023; others will feel the effect as they renew in the coming years. The bank also warned that rates may have to stay higher for longer until inflation is defeated.
How these Canadians are dealing with the high cost of living
CBC News spoke to several people in downtown Toronto about the financial challenges they’re contending with, including housing, food and child care, and what they’re doing to keep expenses down.
Bolduc foresees a potential “snowball effect” as people spend a little less, creating a wider slowdown in economic activity.
“We might have some households which are completely unable to cope with these higher costs and maybe have to default on their mortgages,” he said.
While post-COVID recessions have been repeatedly predicted and have never arrived, Bolduc said almost everyone expects one eventually. The harder question to answer is when it might come.
Some have said Canada is already witnessing “a per capita recession,” where an increase in population means everyone is getting a little less of existing GDP. But the fact is, as the Bank of Canada said, in an economy of richer and poorer, those at the bottom of the heap are getting it worse.
“We can talk in averages, but those averages hide extremes,” said Rogers last week.
OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.
Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.
Business, building and support services saw the largest gain in employment.
Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.
Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.
Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.
Friday’s report also shed some light on the financial health of households.
According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.
That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.
People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.
That compares with just under a quarter of those living in an owned home by a household member.
Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.
That compares with about three in 10 more established immigrants and one in four of people born in Canada.
This report by The Canadian Press was first published Nov. 8, 2024.
The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.
The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.
CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.
This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.
While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.
Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.
The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.
This report by The Canadian Press was first published Nov. 7, 2024.
Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.
As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.
Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.
A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.
More than 77 per cent of Canadian exports go to the U.S.
Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.
“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.
“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”
American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.
It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.
“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.
“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”
A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.
Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.
“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.
Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.
With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”
“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.
“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”
This report by The Canadian Press was first published Nov. 6, 2024.
