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.
TORONTO – Canada’s main stock index posted modest gains Monday, while U.S. markets also rose near the end of the day to kick off the week in the green.
Stocks were down earlier in the afternoon in part because of comments from U.S. Federal Reserve chair Jerome Powell, said Anish Chopra, managing director at Portfolio Management Corp.
Powell said Monday that more interest rate cuts are coming, but not quickly.
“We’re looking at it as a process that will play out over some time,” he said at a conference in Nashville, Tenn.
“It’ll depend on the data, the speed at which we actually go.”
The Fed isn’t in a hurry to cut its key interest rate, said Chopra, as it weighs the upside risks to inflation and the downside risks to the job market.
“Inflation could go up, it could go down, but they believe that if the data remains consistent with what they’ve seen, there will be two more rate cuts coming, but they will be smaller,” said Chopra.
Though the central bank has already signalled it expects to make two more quarter-percentage-point cuts this year, market watchers had been hoping for another outsized cut before the end of the year, he said.
“So I think Powell’s comments from this afternoon disappointed the markets and investors in the sense that if they were anticipating bigger rate cuts, that’s not the news they got.”
In New York, the Dow Jones industrial average was up 17.15 points at 42,330.15. The S&P 500 index was up 24.31 points at 5,762.48, while the Nasdaq composite was up 69.58 points at 18,189.17.
The S&P/TSX composite index closed up 41.31 points at 23,998.13.
At the end of this week, markets will get the latest report on the U.S. labour market, perhaps the most closely watched economic data right now after a couple of softer-than-expected reports prompted fears that higher rates were having too hard an impact on jobs.
If the report is weaker than expected this time, that could change the Fed’s thinking around its interest rate trajectory, said Chopra.
However, the Fed’s next rate decision is in November, he noted, so there’s still another labour report after this week’s release for the central bank to weigh.
Overseas, Asian markets had a frenzied start to the week, with Japanese markets down 4.8 per cent while stocks in China saw their best day in almost 16 years.
Japanese markets sank because investors are questioning whether the new government will be supportive of higher interest rates, said Chopra.
Meanwhile, Chinese markets rallied on the news of more stimulus to the country’s economy, he said.
The Canadian dollar traded for 73.93 cents US, according to XE.com, compared with 74.08 cents US on Friday.
The November crude oil contract was down a penny at US$68.17 per barrel and the November natural gas contract was up two cents at US$2.92 per mmBTU.
The December gold contract was down US$8.70 at US$2,659.40 an ounceand the December copper contract was down five cents at US$4.55 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 30, 2024.
TORONTO – Canada’s main stock index fell in late-morning trading, weighed down by losses in base metal stocks, while U.S. stock markets were mixed to start the trading week.
The S&P/TSX composite index was down 44.33 points at 23,912.49.
In New York, the Dow Jones industrial average was down 101.56 points at 42,211.44. The S&P 500 index was down 0.67 points at 5,737.50, while the Nasdaq composite was up 3.97 points at 18,123.56.
The Canadian dollar traded for 74.04 cents US compared with 74.08 cents US on Friday.
The November crude oil contract was up 66 cents at US$68.84 per barrel and the November natural gas contract was up two cents at US$2.93 per mmBTU.
The December gold contract was down US$14.90 at US$2,653.20 an ounce and the December copper contract was down seven cents at US$4.53 a pound.
This report by The Canadian Press was first published Sept. 30, 2024.
VANCOUVER – Canada’s labour minister says striking grain terminal workers in Metro Vancouver and their employers have reached a tentative labour deal.
Steven MacKinnon announced the agreement between Grain Workers Union Local 333 and the Vancouver Terminal Elevators’ Association in a post on social media platform X, but provided no other details.
The union confirmed the tentative deal in a statement on Facebook, saying its members will conduct the ratification vote by Oct. 4.
The notification from the union also says picket lines were to be removed Saturday and members will return to work pending ratification, ending the strike that had paralyzed grain shipments from Metro Vancouver’s port.
The dispute had previously led to picket lines going up at six Metro Vancouver grain terminals on Tuesday as about 600 workers went on strike.
Canadian grain producers had urged a resolution in the dispute, noting about 52 per cent of the country’s grains moved through Metro Vancouver terminals last year en route to being exported.
Farmers say the strike, happening during crop harvesting, would result in as much as $35 million per day in lost exports.
The Western Grain Elevator Association said on Friday that talks had stalled after two days of negotiations this week, with the employer saying it had increased its offers to settle “outstanding issues.”
The employers group had said they’ve reached the end of their “financial ability to conclude an agreement that industry can absorb” with the last offer, and it was up to the federally appointed mediator to report the results to MacKinnon for the next steps.
MacKinnon says in his tweet that both parties put in “the work necessary to get a deal done.”
This report by The Canadian Press was first published Sept. 28, 2024.
