It’s all over the news. Canada is having it too good these days. Experts are using the R word again.
You know the R word: “Recession”. It’s a dirty word among economists, but one they haven’t been afraid to use lately.
“I think we’re just on the precipice of embarking on a serious recession,” Jim Mylonas, global macro strategist at BCA Research Inc. in Montreal, said from Bloomberg’s Toronto office. “It’s not a matter of if, but when.”
For Mylonas, the irony is that surprisingly strong growth in the U.S. this year may push Canada over the edge.
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The expansion will force the Federal Reserve and Bank of Canada Governor Stephen Poloz to raise rates, he said.
The debt-laden Canadian consumer is ill-equipped to handle higher borrowing costs, unlike their U.S. counterparts, who dialed back borrowing following the housing crash a decade ago, Mylonas said.
But Poloz isn’t buying it.
“We’re certainly not expecting a recession in 2019,” Poloz told CTV News in an interview back in mid-December. “Our fundamentals are quite solid, so the things that we’re facing are more like fender benders than big events.”
Poloz offers the optimistic view of the Canadian economy. That’s the view that is usually shared by Prime Minister Justin Trudeau. But just last month even he sounded a little cautious.
“There are always reflections around the cyclical downturns that happen and…the impacts of a trade war between China and the United States could have significant impacts on the global economy — negative impacts on the global economy,” Trudeau said in an interview with The Canadian Press.
“We have to make sure that we are prepared for rough waters if we encounter them.”
The CBC story from Andy Blatchford quoted a spokesman for the Conference Board of Canada.
“In Canada, potential trouble spots include the combination of high household debt, rising interest rates and slowing wage growth that’s been “terrible” for about half a year following a good pickup early in 2018, said Matt Stewart, director of economics for the board.
Higher interest rates, Stewart added, have delivered a hit to household spending, which has been the primary driver of Canada’s good economic fortunes.
“It’s been a long time since we’ve had a recession,” Stewart said. “As of yet, I think most of the news is still positive, but there is a growing amount of risks.”
So just how great are the risks of a recession in 2019? It depends on who you believe.
Luke Kawa of Bloomberg News said he’s heard that R word.
“This recession call is coming from inside the house,” he wrote. “The Bank of Canada has highlighted elevated household debt and imbalances within the nation’s real estate market as the two chief vulnerabilities to the financial system in the event of a recession.”
But what could trigger such a downturn in the Canadian economy? Macquarie Capital Markets offers one simple answer: the housing market itself — highlighting that the share of employment tied to construction as well as finance, insurance and real estate is nearly two standard deviations above its long-term average.
Tighter mortgage rules and higher interest rates have weighed on activity in formerly high-flying Canadian housing markets, with home sales in Toronto having their worst start to the year since 2009.
And Ontario Premier Doug Ford says there’s one more major indicator of a 2019 recession – the federal Liberal government’s carbon tax.
“I’m here today to ring the warning bell that the risk of a carbon tax recession is very, very real,” Ford told the Economic Club of Canada in Toronto this week. “A carbon tax will be a total economic disaster, not only for our province but for our entire country,” he said. “There are already economic warning signs on the horizon.”
So whether it’s the surging economy in the U.S. or rising household debt in Canada, combined with a sluggish housing market and a crippling carbon tax, a recession is certainly in the realm of possibility.
Hold on Canada. We could be in for a rough ride in 2019.
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