Canadian economy more vulnerable than in 2007-2008

Record levels of public debt mean Canada’s financial stability is more precarious now than it was in the time before the Great Recession, writes HSBC chief economist David Watt.

With the highest household debt-to-GDP ratio in the G7, Canada’s over-leveraged household sector has been identified by the IMF, OECD, credit rating agencies, and the Bank of Canada as a downside risk to financial stability.

Read: Snapshot: Canadian economic data

“Indeed, although it is not our base case, we believe debt levels pose a heightened downside risk to financial stability,” he explains in a research report. “Along with a large current account deficit, we see Canada as more vulnerable to disruptions to global capital flows than when it was heading into the 2007-08 financial crisis.

“While consumers have been an important source of support for the economy, we look for a more moderate consumption profile given the record level of household sector indebtedness and sluggish income growth,” he writes.

“Canada’s private sector, in our view, is essentially tapped out,” he writes.

Read: Is Canada’s pension system world class?

HSBC forecasts subdued growth for Canada: low inflation, low interest trajectory, with GDP growth seen at 1.8% in 2017 and 1.7% in 2018.

Federal stimulus, in turn funded by foreign investment, will be what drives growth going forward, says Watt. He calculates that the current account deficit requires an inflow of 4% of GDP on top of stimulus measures. He cautions that measures to cool foreign investment in Canadian real estate should direct that money to more productive ends inside the national economy.

Read: Housing starts pick up in most regions

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.