Canada on precipice of ‘household led recession’

Canada’s economy faces a major risk through the next three years from how debt-laden consumers cope with higher interest rates, according to economists from three of the country’s largest financial institutions.

Risks in the housing market remain, even after the slowdown in sales earlier this year after the government imposed new regulations, according to Frances Donald, head of macroeconomic strategy at Manulife Asset Management. Consumers still have to prove they can be resilient to higher interest rates, Donald said Tuesday at the Bloomberg Canadian Fixed Income Conference in New York.

“This is something that we are going to have to deal with for several years,” she said.

Consumers no longer have the capacity to lead Canada through another recession the way they did after the global financial crisis a decade ago, said Beata Caranci, chief economist at Toronto-Dominion Bank. While Canada’s fastest population growth in decades provides some support to demand for housing, high debt levels remain a problem that could exacerbate the next recession, she said.

Next Recession

Past 2020, “it’s really going to hit the fan,” Caranci said. “At that point you have high level of indebtedness combined with income stress happening simultaneously. So we are definitely not out of the woods.”

The next recession for Canada will be different than the previous because it will be “a household led recession,” Caranci said.

The risks around consumer finances will lead the Bank of Canada to remain cautious about raising interest rates, said Stefane Marion, chief economist at National Bank of Canada. The central bank will re-assess its path after moving the policy rate to 2 percent, he said, adding that will help avoid a consumer-led downturn. “I don’t see an accident waiting to happen in the housing sector,” Marion said.

U.S. 10-year Treasury bond yields could rise towards 3.5 percent in a time of government deficits and tightening by the Federal Reserve, Marion said, something that will be felt in Canada and its mortgage rates, Marion said.

All three economists said that the risks of higher interest rates will be felt more around 2020. Many mortgage borrowers have fixed-rate loans for terms of up to five years, meaning rate increases over the past year won’t affect their payments for a while.

Additional global risks include potential for a U.S. slowdown or recession in the next few years and trade tensions between the U.S. and China, Donald said.