Tuesday, January 3, 2017

Worrying Economic Predictions at the Turn of the Years

It is probably not the best thing to spoil the reader’s festive mood, but the Canadian economic newswires at the close of 2016 have been dominated by not-so-festive summaries and predictions. The Bank of Canada (BoC) on December 19 published a video presenting risks that the Canadian economy will be facing this year. The video focussed on the Canadian housing that is exposed to high levels of household debt and “housing market imbalances”, the latter being a prudent word for a housing bubble. They walked through a “nightmare” scenario, where in the event of “severe recession” households would begin defaulting on loans, banks would be forced to foreclose on properties, house prices would drop and household wealth would decline. This would in turn negatively affect the banks and other lenders’ profitability.

What is different this time from the similar situation, which happened in the U.S. in 2007, implied the BoC, is that the big Canadian banks are now in good shape and would handle even a large drop in house prices. But the impact, on the wider economy, could still be “significant”.

Whether the BoC is indeed expecting a severe recession this year or is merely warning Canadians from continuing to accumulate large debts, wasn’t quite clear from the video. But, this kind of warning should not be taken lightly. Especially given the recent forecast by the U.K.-based Centre for Economics and Business Research which says that Canadian GDP will grow by just 1.8% annually from 2016 to 2020 before growth would accelerate to the 2% level from 2021 to 2030. This low level of expected economic expansion could easily be negated with even a slight increase in economic stresses. 

Ukrainian Credit Union Limited

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