Canada’s economy is bracing for its steepest decline on record in the coming months, with unemployment set to rise to its highest in nearly a quarter of a century. Almost 1 million Canadians applied for jobless claims last week, representing almost 5% of the labor force, this does not include the thousands of claims filed over the weekend.
The speed of the jobless claims is record-breaking, the previous record for an entire month was 499,200 which happened in 1957, according to Statistics Canada data. We anticipate the unemployment in Canada will eventually spike higher than where it was in the early 1990s which, was 11.3%.
One of our greatest concerns with regards to the Canadian economy is its banking system even though its balance sheets are much stronger than 2008.
With this being a major business and consumer recession, timing could never be worse. There is extreme corporate and consumer leverage presently persisting throughout Canada, with debt levels in all tiers nearing all time highs.
Let’s begin with Canada’s corporate debt. Firstly, Canadian corporate debt is extremely high when compared to international peers. It has skyrocketed this past decade and way above previous highs, which many in the Canadian financial media have overlooked.
Currently, the nonfinancial corporate debt-to-GDP ratio is 118.7%, which ranks third amongst G20 countries, behind China and France (with debt-to-GDP ratios of 154.5% and 154.1%). This only bolsters risk as the Canadian economy is already constrained on a credit basis. With the economic downturn now in full force, corporate indebtedness will certainly widen corporate bond spreads and cause unfathomable delinquency rates.
The Canadian Central Bank will likely soon begin a quantitative easing program for the first time in the nation’s history. As governor Stephen Poloz issued a restatement of the Bank of Canada’s policy in the Canada Gazette on March 13 on policies for purchasing securities, that includes the right to buy the debt of companies and municipalities when it is “addressing a situation of financial system stress that could have material macroeconomic consequences.
Many believe the central bank will be forced to purchase up to $150 billion in securities as the economy is expected to shrink between 10 – 24% on an annualized basis during this recession. So the Canadian Banks do have the support of the Bank of Canada to help combat the soon to be wave of delinquencies. However, they face a double-edged sword here as the next issue is Canadian household debt.
Canada currently sits third within the G20 for household debt to GDP:
Canada’s economy is currently more dependent on indebted households than at any time since at least the 1960s, and now with the economy heading for a steep economic depression, how can the government rely on the citizens to bail out the economy?
It seems the Canadian Prime Minister, is already putting things in motion that will force Canadian citizens to pay unprecedented taxes in the coming years. But the question is, how will they afford it? They are already buried in debt. But taxes are always mandatory, so it seems they will have no other choice other than to liquidate the assets they do have.
It has been reported, Prime Minister Justin Trudeau is tabling a bill that will grant the government extensive new powers to spend money and raise taxes without having to get the approval of Parliament.
The legislation will grant Finance Minister Bill Morneau astonishing new powers to spend, borrow and tax without having to get the approval of opposition MPs until December 2021. If this bill gets put into motion, foreign investments could be drastically liquidated as foreign investors become spooked due to this new bill which could accelerate the inevitable plunge of real estate values across the country.
With this emerging new environment, it is also expected that the Bank of Canada will soon implement a zero interest rate policy before they cut again to negative interest rates to support this tumbling economy. The governor has made it clear that he is not a fan of the policy, but he might not have any other choice when it comes to trying to spur the economy in a highly distressing economic reality. For anyone unsure of negative interest rates, in short, it is when you pay your banks to hold your deposits.
This loops back to the question, how will the Canadian Banks handle all of this? Will there be a banking crisis? Remember, a banking emergency can happen at any time as all banks are fractionalized, and when confidence is rocked, that is when a financial crisis within banks begin. There are already early estimates that Canada’s six biggest lenders – Royal Bank of Canada, TD Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and the National Bank of Canada) could post an average 32% decline in fiscal 2021 earnings.
Time will tell, but the Canadian economy looks like its on the verge of a nasty collapse.