Canadian Economic Progress Imperiled by Trump's Trade Conflicts, Bank of Canada Issues Alert
Canadian households and businesses were thriving, but the U.S. instigating a trade war dented the nation's financial health, according to the Bank of Canada's latest Financial Stability Report.
Back in January, the average debt for households had decreased relative to their income compared to the previous year, while business insolvencies nosedived. "Our financial system has taken some extraordinary hits, but it's shown remarkable resilience," said governor Tiff Macklem, referring to the past challenges.
However, the trade war has raised overall risks. Macklem warned, "The U.S. trade policy has taken a dramatic protectionist shift, leading to tariffs, uncertainty, and reduced global growth prospects."
This trade dispute looms as the greatest threat to the Canadian economy. Macklem cautioned about both short-term market volatility and long-term risks of a prolonged trade war, such as reduced growth and increased unemployment.
In a worst-case scenario, Canadians could struggle with mortgage payments at levels unseen in several decades. The Bank of Canada foresees mortgage arrears surpassing 0.5% if the trade war persists, surpassing levels reached during the 2008-09 financial crisis, though still below the more than 0.6% seen in the 1990s.
Government support could mitigate these impacts, although its distribution is yet to be seen. An International Monetary Fund stress-test scenario included in the report uses a more extreme scenario. Despite the Bank of Canada's own risk scenario depicting a recession lasting four quarters, close to 2008-09 and 1990-91 recessions, the IMF scenario tests against seven quarters.
In the IMF's scenario, GDP could plummet by 5.1%, unemployment might peak at 9.2%, house prices could drop 26%, and equities could fall by 36%. This stark contrast from the start of the year highlights the uncertainty surrounding the trade war's impact on the Canadian economy.
With a sharp drop in interest rates in 2024, mortgage payments are not expected to rise as feared, with an approximately 8% increase at renewal in 2025 and 5% in 2026. Many homeowners have also seen their incomes rise and property values soar, lowering the overall Canadian ratio of household debt to disposable income to 173% at the end of 2024, down from 179% at the end of 2023.
Non-financial businesses remain financially healthy, the bank noted, with a spike in insolvencies quickly subsiding after the end of government support. The cost of financing and new debt issuance remained low until the beginning of April.
Although lower interest rates have fortified the resilience of businesses and those with mortgages, non-mortgage households still show signs of escalating economic stress. The report indicates that credit card and auto loan payments more than 60 days overdue have surpassed pre-pandemic levels, surpassing historical averages. In contrast, mortgage arrears for households with mortgages remain below historical averages.
With high debt levels compared to historical standards, Canadians face elevated risks if the trade war persists, particularly for those more exposed to trade. Canadian banks have substantial capital reserves and credit loss provisions, making them well-prepared to bear higher losses. Despite this preparedness, the Bank of Canada emphasized the need for vigilance due to the ongoing risks.
"We've still got many uncertainties to deal with," Macklem concluded. "We don't know how long this will last or how deep it will go. That makes it incredibly hard to predict the impact on the financial system."
This report by The Canadian Press was first published May 8, 2025.
By Ian Bickis, The Canadian Press
Households and businesses face financial hardships due to the U.S.-instigated trade war, with disrupted supply chains, escalating costs, and market uncertainties straining Canadian businesses and raising prices and economic uncertainties for households.
This trade war leads to supply chain disruptions and increased costs for businesses in sectors like manufacturing, forestry, textiles, and electronics. Canadian businesses could experience collateral damage from tariffs, especially those involved in cross-border trade or goods sourced from China to sell in the U.S. market.
For households, the trade war may erode purchasing power through higher costs and increase employment and wage risks due to reduced investment and hiring growth. Additionally, financial market volatility and uncertain business sentiment may reduce consumer confidence and spending.
While the trade war poses a challenge for the Canadian economy, opportunities exist for the agriculture sector, such as potential soybean exports to China. However, these opportunities are modest and won't significantly impact the broader Canadian economy.
Canada's financial system remains resilient but requires ongoing vigilance to navigate such financial health challenges. Businesses should focus on adapting to shifting trade patterns and diversifying supply sources, while households may have to prepare for higher prices and economic uncertainties if the trade war persists, particularly for those more exposed to international trade.
- The U.S.-instigated trade war is straining Canadian businesses, with disrupted supply chains and increased costs in sectors like manufacturing, forestry, textiles, and electronics.
- For households, the trade war may erode purchasing power through higher costs and increase employment and wage risks due to reduced investment and hiring growth.
- Financial market volatility and uncertain business sentiment may reduce consumer confidence and spending, putting additional pressure on Canadian households.
- Although Canada's financial system has shown remarkable resilience, it requires ongoing vigilance to navigate the challenges posed by the trade war.
- Businesses should focus on adapting to shifting trade patterns and diversifying supply sources, while households may have to prepare for higher prices and economic uncertainties if the trade war persists.
- Opportunities for the agriculture sector, such as potential soybean exports to China, are modest and won't significantly impact the broader Canadian economy.
