Gloomy warnings again despite strong forecasts for Canada’s economy

A new report by the Organization for Economic Co-operation and Development estimates that Canada’s GDP will experience growth in 2017 of 3.2% (up from the previous estimate of 2.8%) which would be the fastest growth for any G7 country. However, despite the forecast of strong growth in the near future, this report identifies potential headwinds for the Canadian economy stemming from vulnerability in the Canadian housing market. The report stated that unaffordability and growing household debt may lead to a market correction that could threaten financial stability.

Moody’s Analytics, quoted in the Financial Post, also recently highlighted the risks coming from the Canadian housing market. This subsidiary of the ratings agency believes that one of the problems is that insurers of more than 50% of all mortgages in Canada are backed by the government. If a major downturn were to happen on the housing market, government debt would rise.

Moody’s Analytics assures that, in the worst case scenario, Canada’s debt-to-GDP ratio would rise to about 105%, above the U.S. at 99% but still below many of Europe’s largest economies debt burden ratios. However, government debt would not be the biggest problem in this kind of scenario. Other factors such as household defaults on mortgages and economic downturn stemming from lower spending would pose bigger problems.

Things are now hanging in the balance and if economic growth continues and higher interest rates do not lead to defaults on mortgages, Canada’s housing market may find an equilibrium which would prevent this kind of dangerous domino effect for the economy.

Ukrainian Credit Union Limited