The days of crisis and economic slowdown are over; there is no reason for us to worry anymore. Or is there? There are probably more challenges facing the Canadian economy than we realize. The following article will try to describe the reasons and events that might cause considerable turmoil on the housing and financial markets, resulting in overall instability throughout the economic spectrum.
Is Japan to Blame?
The Bank of Canada assumes that the decline in economic growth is going to be a short-term problem, and that the second half will be characterized by more rapid growth. This is based entirely on a probable but uncertain supposition that levels of energy prices will not rise, and that they’re more likely to decline. The recent reason for the depression, however, is assumed to have arisen from events in Japan. At first sight, this reasoning might look flawless, but if you start digging deeper, you realize that since our economy is represented mainly by consumers, we must look elsewhere. Of course, the Japanese issue has an incontestable impact on the economy, but the thing is that it is not even close to being the main reason for the slowdown. The majority of consumers are baffled by the effects of gasoline prices and uncertain job growth. This takes us back to the question of the stabilization of energy price levels in the near future. This is unfortunately only alleged.
What about debt?
Does anyone remember the US household debt-to-income ratio in 2007, the year preceding the credit crisis? It was one of the lowest the country has ever experienced. The Canadian ratio is currently around 1.5, a bit higher than the US pre-depression ratio. We can say that the present situation in the Canadian banking sector is more stable and better prepared for the debt shock. If it came, the impact of a decline in home prices caused by the recession would have considerably milder effects on banking sector profits than it had four years ago on the US one. This means that the Canadian economy probably wouldn’t need to carry the burden of bailouts that stormed the US economy and US politics as well.
The one thing that has to be clear to everyone is that the Canadian economy is closely bound to that of the US — especially in the field of bank stocks. Thus, it doesn’t matter how strong and stable the situation on the domestic market currently is; US problems have the potential to hit us hard. Since we’re on the issue of interdependence, we have to consider other countries as well. The contagion might hit from Europe, which is currently having some serious problems concerning Portugal, Ireland, and Greece — or even from the Chinese real estate market! In this situation, we might face a series of very unfortunate events: a decline in commodity prices, destroying the economy’s potential, or shifts in the equity market and the above-mentioned contagion of the housing sector in case of tightened credits. We should be wary of problems like these.