The Bank of Canada says the economy is navigating a “volatile” global environment and that “vulnerabilities” exist that could expose Canada to potential shocks on multiple fronts.
The central bank released its annual Financial Stability Report on Thursday, which gauges the resilience of the Canadian financial system and highlights key risks that could undermine that resilience. It was penned by Senior Deputy Governor Carolyn Rogers, along with Deputy Governor Toni Gravelle.
“Canada’s financial system has functioned well through a challenging year,” Rogers said in the report.
“However, vulnerabilities have increased in some parts of the system.
“The economic and geopolitical environment has become more volatile. And this has made it more likely that a new shock or a combination of shocks could cause several vulnerabilities to crystalize at once. If this were to happen, these vulnerabilities could interact and reinforce each other.”
This means that Canada’s economy could be exposed to damage if some of these risks escalate and become much more serious.
Among the main risks outlined in the report is global uncertainty stemming from the war in the Middle East.
The conflict, which began in February when the U.S. and Israel launched joint attacks on Iran, has jeopardized the world’s supply of oil, natural gas, fertilizer and other products.
The Iran war, the bank says, “has added to global uncertainty, leading to volatility in some markets.”
Last year’s report was heavily focused on risks stemming from the trade war and U.S. tariffs, and Rogers says those risks remain as Canada and the U.S. intensify talks towards the review of CUSMA.
“The impacts [of the trade war] have been less widespread than we originally feared. But this risk has not gone away, and the future of Canada’s trade relationship with the United States remains uncertain.”
Rogers also cautions about new threats emerging from artificial intelligence (AI).
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“AI is expected to boost productivity and economic growth over time, but it is sparking concerns about disruption in some sectors and about overinvestment,” she said.
“AI may also increase the speed, scale and sophistication of cyber attacks.”
Gravelle then noted high household debt levels in Canada, and said this leaves many Canadians vulnerable to potential economic shocks.
“Canadians continue to carry high levels of debt relative to their income, but overall household wealth has risen,” Gravelle said.
“This overall picture masks important differences.
“Some households face far greater strain than others, and those with the highest debt burden have very little financial flexibility to cope with a job loss or an unexpected expense.
“The main concern for both households and businesses is a geopolitical or economic shock that leads to a deep recession and a sharp rise in unemployment.”
Rogers and Gravelle spoke to the media on Thursday following the release of the Financial Stability Report.
Rogers acknowledged the data that the Bank analyzes does not always reveal the nuances of Canada’s economy, including how small businesses and struggling households are handling their finances.
This, she explains, is because most of the data that ends up being analyzed factors in the overall performance, and a growing wealth divide between higher and lower incomes may not be seen as clearly as a result.
For example higher revenue corporate businesses may be better able to pay down commercial mortgages, and that may overshadow lower revenue small businesses that are insolvent from falling behind on payments.
“At a business level, the data that we have in our financial stability report is really more at a corporate level. It’s harder for us to get data in the small business sector,” she said.
“But, I think we’re conscious that there are things that the data doesn’t measure well.”
Rogers said a similar result can be seen among households, where there is “inequality” as a result of the growing divide in wealth.
This is because higher incomes may be better able to pay off mortgages than those with lower incomes, and this leads to an overall clouded picture.
“The gains that have helped households, the gains that we talked about that helped us through the mortgage renewals, income increases, increases in household wealth that we talk about in the report, those aren’t spread equally across households, of course — so there is some inequality there,” she said.
“There is no doubt still some households where those gains have either not occurred or not occurred to a level that are helping them deal with the higher cost of living. So there’s still going to be some stress there.“
Rogers added that regardless of what the data shows, it doesn’t clearly measure how Canadians “feel” about their finances and the economic outlook.
“It can be true that the data looks better and people still feel stressed. Canadians have gone through a lot of economic and financial stress over the last years,” she said.
“The headlines feel precarious, [and] things feel uneasy. So even households that are coping well and able to make their debt payments, that all gives us really nice looking data. [But,] I’m sure there’s still a level of stress there.”
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