September 8, 2022 | Desjardins: Canada the Most Debt Sensitive Economy in the World

Canada comes into this global downturn with a world-leading real estate bubble (property values accounting for some two-thirds of household net worth) and record-private debt levels at a whopping $7 trillion (households and businesses) in an economy tracking about $2.6 trillion in GDP.

A bursting debt bubble in a poorly diversified economy largely dependent on unsustainable demand for housing and fossil fuels leaves Canada among the most rate-sensitive economies in the world today.

Now, inflation-chasing central banks have ignited the greatest rate shock in at least four decades. Moreover, their hikes since March are only starting to move through the economy and will continue to do so over the next two years. A similar multi-quarter lag will apply once central banks move to loosen monetary conditions once more.

In the video segment below, bank analyst Jean hedges his recession call with the hope it will be shallow. I do, too, though I see little evidence to support the hope.

In any event, no historical precedents suggest that a shallow recession would mean shallow losses in asset markets. Indeed, in the 2000-2003 bear market, the US experienced a shallow recession while Canada avoided one altogether. Yet stock markets in both countries halved and took years to recover to previous cycle highs.

Fast forward to 2008, Canada experienced a much milder recession than in America (because our housing market was not yet in a bubble at that time). Still, stock markets in both countries halved, bottomed together in March 2009 and took years (of near-zero rates and trillions in central bank asset buying) to recover. Realism and capital defence are highly recommended.

Jimmy Jean, chief economist and strategist at Desjardins, joins BNN Bloomberg to react to the latest interest rate decision out of the Bank of Canada. He says that it will take 6-8 quarters to see the full effects of rising rates, but the impact on the jobs market will start to show soon. Here is a direct video link. 

Danielle Park September 8th, 2022

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