The finances of Canadians, their businesses and their banks would not be unscathed from an prolonged trade war against the United States, but they should still hold on, said the Bank of Canada.
It’s a shame, said the central bank on Thursday in the 2025 edition of its Financial stability report. After having managed to overcome the pandemic, the period of high inflation and the marked increase in interest rates, households, businesses, banks and other financial players in Canada had found a way to improve their financial assizes in the last 12 months more than what we expected on such a date last year.
A concern for a long time, household debt in proportion to their disposable income has decreased slightly (from 179 % to 173 %) for the first time in years. While about 60 % of all mortgage loans under reimbursement in the country must be renewed this year or next year, the rapid drop in interest rates for a year should also result in less pronounced increases in payments than provided for a year ago.
In fact, the Bank of Canada is done less for these mortgage holders than for all other Canadians, which we have rarely seen as often late in the payment of their car loans and their credit card sales.
The number of insolvency files submitted by companies has also “considerably decreased” in one year. The banks, for their part, have been able to build up liquidity and other financial cushions in the event of a hard blow.
“American Radical Protectionism”
But that’s it. All this is to count without the effect that the trade policy of the United States could have and its “radical protectionist turn,” said the governor of the Banque du Canada, Tiff Macklem, at a press conference.
In its overall portrait of economic and financial prospects, last month, the Bank of Canada estimated the situation too unpredictable and volatile to risk making official forecasts. Instead, she had presented two scenarios to illustrate the field of possibilities: one on a crisis that would deflate quickly, the other on an extended world trade war.
In its report on Thursday, the central bank focused on the darkest assumptions, its own, like those of a recent test of the resilience of the Canadian financial system recently carried out by the International Monetary Fund. Not because they are the most likely, said Tiff Macklem, but because they are most likely to highlight Canada vulnerabilities.
In the short term, the main threat is that the unpredictability of the White House increases so much the volatility of the financial markets that it will cause liquidity problems there and even, in extreme cases, operating problems.
In the medium term, a major prolonged crisis would not fail to affect the real economy, in particular workers and businesses most dependent on trade, who would find it increasingly difficult to pay their debts. In this case, the proportion of delayed households in their mortgage payments could exceed the levels achieved during the global financial crisis of 2008-2009.
These difficulties of households and businesses would not fail to affect banks, which could be forced to tighten their credit offer, which would make them either “shock absorbers”, but “amplifiers” of crisis.
Watch out for hedge funds
The Bank of Canada also looks at the role played by other financial players, including cover funds (hedge funds).
Increasingly present, the latter left almost nothing to represent today more than 40 % of the government’s obligations market of Canada. What is well in normal period, explained the first sub-government, Carolyn Rogers, because it maintains “lower yields and higher liquidity”.
But this also arouses “certain concerns”, because these actors have largely recourse to the financial lever (loans) to buy these obligations, which makes them “more likely to withdraw from these essential markets in times of tensions [et] adds to volatility ”.
In conclusion, “the Canadian financial system is resilient,” said Tiff Macklem. “But we have to remain vigilant. Vulnerabilities remain. »»
