Factors such as delinquencies from the long-struggling oil sector and emerging evidence of weakness in overheated housing markets are placing the Canadian economy at a significant risk of a major downturn, according to an analysis published Tuesday.
While the Bank of Canada’s interest rates are still showing an optimistic view of the economy’s prospects, signs of eventual trouble are gradually popping up, CBS News reported.
In particular, bad debts from the energy sector and increased competition from online counterparts are forcing Canadian banks to downsize and even retreat altogether from at-risk markets.
Above all, banks need to lend, and they would likely be thrilled to lend to support the surge in output that Bank of Canada Governor Stephen Poloz has been predicting. But they need the borrowers. If fiscal spending fails to restart the economy soon, some are predicting Poloz will cut rates later this year.
However, the bank governor has warned that the impact of cuts is losing its power.
Poloz’s statements are indicating that negative rates remain an option in the worst-case scenario—a reassuring thought for real estate, which in its current state cannot afford the burden of higher rates.
“The painful bankruptcy of Canadian home builder Urbancorp and pressure for governments to intervene in what many are calling an affordability crisis have some commentators worried that Canadian real estate is at a peak,” analyst Don Pittis told CBS News.
“Despite evidence that real estate is a major driver of jobs and the economy, ominous warnings are easy to dismiss because they have been offered so often. This time, however, we have real evidence that markets outside Vancouver and Toronto have begun to weaken,” he added.
Most worryingly, Poloz himself said that Canadian real estate is not all that it seems, Pittis noted.
“There’s a crater under every bubble,” the analysis quoted the BoC governor as saying.
The Bank of Canada says the Canadian economy is headed for its third quarterly contraction since the start of 2015, knocked off its stride by destructive Alberta wildfires and weak business investment.
The central bank, which held its key interest rate unchanged Wednesday, said growth will rebound in the third quarter as the oil patch gets back to full production and the rebuilding of Fort McMurray begins.
The hit from the fires, which triggered widespread oil sands production cuts and destroyed thousands of buildings in the northern Alberta city, will knock 1.25 percentage points off gross domestic product in the April-to-June period, BoC said.
