Variable-rate borrowers not on fixed payments have already experienced the pain, with payments rising close to 50 per cent over the past year. In its Financial System Review, the Bank ran a mortgage simulation to estimate just how bad the reckoning will be. Was this newsletter forwarded to you? Sign up here to get it delivered to your inbox.Ĭanadians who took out mortgages at rock-bottom rates during the pandemic face a serious reckoning when they renew, the Bank of Canada reminded us yesterday. “We put more stock in leading indicators to help guide our forecasts, and several key leading indicators continue to strongly suggest a recession is on the horizon,” said Davenport. Oxford says, except for the pandemic and downturn that followed the oil crash of 2015, its model has correctly predicted all recessions since the late 1970s. The OECD’s indicator for Canada is now at its lowest level since the worst days of the pandemic, and before that the financial crisis, falling below a threshold that in the past has only been breached prior to recessions. Built to detect turning points in business cycles, this indicator has also proven to be a good predictor of recessions, Oxford says. “This will constrict business investment, help drive another leg down in house prices, and restrain household spending, particularly for durable goods.”Īnother source Oxford uses is the Organisation for Economic Co-operation and Development’s composite leading indicator. “We expect lending conditions will tighten further as global banking stress lingers and the full impact of last year’s aggressive monetary policy tightening continues to flow through to the Canadian economy,” said Davenport. Lending conditions for business are the tightest since the start of the pandemic, and the tightest on records going back to 2017 for households. Oxford’s model also points to the Bank of Canada’s own senior loan officer survey out recently that showed tighter lending conditions for households and businesses. This impact alone could shave almost a percentage point off Canada’s GDP by early 2024, Oxford predicts. “The deterioration in financial conditions is a key reason why we think the Canadian economy will slip into recession this year,” said Davenport. This impact will be particularly acute in Canada, compared with other advanced economies, because of its high household debt and vulnerable housing sector. Oxford calculates that the financial environment in Canada is now the most restrictive it’s been since the global financial crisis - and since this tightening takes a while to work through the economy the full impact won’t be felt until the second half of this year. They improved slightly early in the year because of stronger equity markets and Canadian dollar, but then deteriorated again after the U.S. Financial conditions tightened in 2022 as the Bank of Canada and United States Federal Reserve aggressively raised interest rates. One of Oxford’s key leading indicators, financial conditions, hits the economy with a lag. Typically, recessions begin four months after the threshold is breached, “suggesting a recession is imminent.” Oxford’s model has now surpassed the threshold breached before four of the past five recessions (pandemic excluded) for nine straight months, said Davenport. That’s the highest probability since 1981, and higher than the odds before four of the past six recessions. Their model suggests there is an 84 per cent chance of a recession in the second half of this year. All but one of its 12 indicators for Canada are flashing red. Oxford bases its recession probability model on leading indicators, such as financial conditions, how tight lending is, corporate spread, money supply and yield curves. It is a lagging indicator that says more about where the economy was in late 2022 than where it is heading, he said. Just because the economy outperformed expectations in the first quarter doesn’t mean it will continue to do so, said Oxford economist Michael Davenport.
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