The economy of Canada will face a significant risk in the next three years as indebted consumers will respond to higher interest rates, this fact is made available by economists from three of the largest financial institutions in Canada.
According to Frances Donald, the head of macroeconomic strategy at Manulife Asset Management, she said the risks in the housing market is still there, after the slow pace in sales recorded earlier in this year when new regulations were imposed by the government. According to her submission at the Bloomberg Canadian Fixed Income Conference in New York on Tuesday, consumers will have to prove their resilience to the increased higher rates. She said that Canada must deal with the scenario for the next few years.
According to Beata Caranci, the chief economist at Toronto-Dominion Bank, she said the consumers lack the power to take Canada out of recession like they did ten years after the global financial collapse. Despite the fact that Canada’s fastest population growth in decades offers support for the housing demand, it has been faced with the problem of high debt levels which could trigger the next recession, she concluded.
She further explained that it will escalate beyond 2020, and the level of indebtedness coupled with the income anxiety occurring simultaneously, and we are not out of the woods. Caranci said that the next recession for Canada will be different from the recession that has occurred in the past as it will be a household led recession.
The chief economist at National Bank of Canada, Stefane Marion said that the risks around consumer finances will compel the Bank of Canada to be careful with the issue of increasing interest rates. He also added that there will be a path reassessment from the central bank after increasing the policy rate to two percent. He asserted that this will prevent a downturn led by consumers, as he does not visualize such incident waiting to occur in the housing sector.
He also suggested that there is a probability that the United States ten-year treasury bond yields could increase towards 3.5 percent at a time that the Federal Reserve is tightening and there is a presence of government deficits. It will definitely have impact in Canada and its mortgage rates.
The three economists confirmed that the risks of increased interest rates will be more visible around 2020. Most of the mortgage borrowers have their fixed rate loans for various terms to the period of five years; this signify that increment in the rates over the previous year will not have impact on their payments for some time. Donald suggested that further global risks are potential for a United States slowdown or economic recession in the next coming years and trade problems between China and the United States.
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