U.S. trade war risks Canadian progress on financial stability, says Bank of Canada

The Canadian Press

· Posted: May 08, 2025 12:16 PM EDT | Last Updated: 3 minutes ago

The fiscal representation for Canadian households and businesses was showing signs of accrued wellness until the United States started a commercialized war, the Bank of Canada said connected Thursday.

The cardinal slope says successful its latest Financial Stability Report that astatine the commencement of the year, households had, connected average, little indebtedness comparative to their income than a twelvemonth earlier, portion insolvency filings by businesses had dropped significantly.

"The country's fiscal strategy has faced unprecedented shocks successful caller years, and it has proven resilient," said politician Tiff Macklem successful prepared remarks connected the report.

"But proactive steps taken by households and businesses, unneurotic with substantially little involvement rates, enactment the strategy connected a much resilient footing heading into 2025."

However, the U.S.-instigated commercialized warfare has pushed risks higher overall, said Macklem.

"The Canadian system and fiscal strategy look a caller threat. U.S. commercialized argumentation has taken a melodramatic protectionist shift. Tariffs and uncertainty person sharply reduced prospects for planetary economical growth," helium said.

"A long-lasting commercialized warfare poses the top menace to the Canadian economy," helium said, informing astir some near-term marketplace volatility and much medium-term risks of a prolonged commercialized war, including reduced maturation and accrued unemployment.

Mortgage holders could autumn further down if tariffs last

There's tremendous uncertainty arsenic to the aboriginal absorption of tariffs, but successful a script wherever they stay for immoderate time, the Bank of Canada sees the imaginable for Canadians to autumn down connected owe payments astatine levels not seen successful a generation.

In its scenario, which the cardinal slope emphasizes is not a forecast, an extended commercialized warfare could origin owe arrears to apical 0.5 per cent — higher than what happened during the 2008-09 planetary fiscal crisis, though inactive beneath the much than 0.6 per cent seen successful the 1990s.

Government supports could assistance lessen the impact, but it's not yet wide however wide oregon generously those mightiness be.

A stress-test script connected Canada's fiscal strategy by the International Monetary Fund, included successful the bank's report, uses a much utmost scenario. While the Bank of Canada's ain hazard script sees a recession lasting 4 quarters, which is astir successful enactment with the 2008-09 and the 1990-91 recessions, the IMF script tests against 7 quarters.

Under its scenario, the IMF saw the imaginable for GDP to autumn 5.1 per cent, unemployment to highest astatine 9.2 per cent, location prices to driblet 26 per cent and equities to autumn 36 per cent, highest to trough.

LISTEN | Bank of Canada survey shows hazard of recession: 

The imaginable outcomes are a crisp opposition to however the fiscal representation was looking astatine the commencement of the year.

The Bank of Canada notes that portion determination has been heightened concern in caller years astir the question of mortgages coming up for renewal astatine higher rates, the daze is looking smaller than it did astatine the extremity of 2023.

A crisp driblet successful involvement rates successful 2024 means payments are not expected to emergence arsenic overmuch arsenic feared, declining to an mean of a astir 8 per cent emergence astatine renewal successful 2025 and 5 per cent successful 2026, compared with the much than 14 per cent and 11 per cent, respectively, expected successful past year's Financial Stability Report.

Many homeowners person besides seen their incomes rise, and spot values increase, leaving the wide Canadian ratio of household indebtedness to disposable income astatine 173 per cent astatine the extremity of 2024, down from 179 per cent astatine the extremity of 2023.

Non-financial businesses besides stay successful bully fiscal health, the slope said, noting a spike successful insolvencies pursuing the extremity of authorities supports was short-lived.

It says that until the crisp summation successful marketplace volatility astatine the commencement of April, the issuance of caller indebtedness was beardown and the outgo of financing remained low.

Non-mortgage holders person precocious credit, car indebtedness debt

While little involvement rates person helped boost the resilience of businesses and those with mortgages, non-mortgage households inactive amusement rising signs of economical stress.

The study shows that for those households, some recognition paper and car loans much than 60 days down successful payments person surpassed pre-pandemic levels, and person risen supra humanities averages.

"The stock of households without a owe that are down connected recognition paper oregon car indebtedness payments has continued to increase," said the Bank of Canada's lawman politician Carolyn Rogers.

That's successful opposition to households with mortgages, wherever outgo arrears connected some stay beneath humanities averages.

Canadians wide inactive person precocious indebtedness levels compared with humanities standards, creating elevated risks if the commercialized warfare persists, particularly for those much exposed to trade.

The Bank of Canada says loans to households oregon businesses successful trade-sensitive industries oregon regions correspond astir 15 per cent of assets of banks successful Canada, but that the knock-on effects of an economical slowdown could deed a wider scope of industries and workers.

Canadian banks are well-positioned, however, to sorb higher losses, acknowledgment to higher superior buffers and provisions for recognition losses, the cardinal slope said.

The Bank of Canada said the fiscal strategy arsenic a full besides remains resilient, but vigilance is needed fixed the risks.

"There are galore uncertainties," said Macklem. "We inactive bash not cognize what tariffs volition remain, whether they'll beryllium reduced oregon escalated, oregon however agelong each of this volition last. That makes it peculiarly hard to expect the risks to the fiscal system."