Briefing highlights
- BIS warns of rising threat
- PSA strikes deal for GM's Opel
- What to expect from trade report
- What will jobs reports show?
- China trims 2017 growth target
Likely stress
An early-warning indicator of potential financial crises suggests a mounting threat to Canada’s banking system.
It’s a measure of credit, compared to long-term trends, that puts Canada near the top of the list for likely stress on a financial system.
This may be the latest in a series of debt warnings from observers across the globe. But this one, released Monday, comes from the Bank for International Settlements, a body made up of the world’s central banks.
And unlike measures that look solely at household debt, which has been the focus of alarm in Canada for many years, the BIS indicator includes all credit to the non-financial sector, taking in loans and other instruments such as debt securities, for example.
The BIS indicator looks at the ratio of credit to gross domestic product, comparing the current level to its long-term trend.
The stress warning comes from the gap between the ratio and the long-term trend, a gap that has been widening in Canada.
Indeed, by the third quarter of last year, it rose to 17.4 percentage points above the long-term average, second only to China’s off-the-chart reading among a select group of countries, according to this table, which “summarizes the early warning indicators for domestic banking risks.”
And as this chart illustrates, Canada’s credit-to-GDP gap has been swelling for several years.
What’s actually more important than the widening gap is the simple fact that it tops the 10 mark, a key threshold.
“Early warning indicators for financial crises continue to signal vulnerabilities in several jurisdictions,” the BIS said in Monday’s quarterly review, noting that China is far above the threshold and putting Canada in something of a special category.
“Canada, as well as a group of Asian countries, saw increases in the credit gap since September, 2016.”
Meant to flag the possibility of a crisis within a three-year period, the gap serves as guidance to how fat bank capital buffers should be.
We come in for special mention in other categories, as well, as these measures show.
Given the focus on Canadian real estate, it’s no surprise we’re flagged for a residential “property price gap” that looks at “deviations” from the long-term trend.
Then there’s what it takes to service the debt.
Debt Service Ratios
As of third quarter, 2016
| Country | DSR | DSR if interest rates rise by 250 basis points |
|---|---|---|
| Spain | –3.2 | –0.4 |
| China | 5.4 | 8.8 |
| Canada | 3.6 | 7.9 |
| Netherlands | 0.8 | 5.6 |
| Australia | 1.4 | 5.3 |
| Brazil | 3 | 4.6 |
| Asia | 2 | 4.3 |
| France | 1.1 | 4.2 |
| Nordic countries | 0.1 | 3.9 |
| Switzerland | 0 | 3.2 |
| Korea | –0.5 | 3.1 |
| Britain | –1.2 | 1.7 |
| Portugal | –1.6 | 1.6 |
| Italy | –0.5 | 1.5 |
| Mexico | 0.8 | 1.5 |
| South Africa | –0.3 | 1.1 |
| United States | –1.4 | 1.1 |
| Central and eastern Europe | –0.5 | 0.9 |
| Japan | –2.2 | 0.5 |
| Germany | –1.8 | 0.1 |
| Greece | ||
| India | 2.5 | |
| Turkey | 6.7 |
Anyone particularly surprised by the stress indicated should interest rates rise by 250 basis points, or 2.5 percentage points? Other observers have flagged this, as well.
“For most countries, debt service ratios stand at manageable levels under the assumption of no change in interest rates,” the BIS said.
“Under more stressed conditions – a 250-basis-point increase in rates – and assuming 100-per-cent pass-through, the numbers point to potential risks in Canada, China and Turkey,” it added, stressing these numbers “are meant to be only indicative, and are not the outcome of a proper stress test.”
Interest rates are going to rise, though not at a particularly fast pace.
The Bank of Canada, which has oft cited household debt levels as a trouble spot, said the measure used by the BIS is "one of many tools" to monitor financial vulnerabilities.
"As Canada's central bank, we don’t rely mechanistically on any single measure, but look at a wide range of indicators when assessing Canadian financial system vulnerabilities," said spokesman Martin Bégin.
"We provide our comprehensive assessment of these vulnerabilities and the risks to financial stability twice yearly in our Financial System Review."
At more than $2-trillion in outstanding balances, Canadian households have the highest level of debt, as a share of the economy, among countries that make up the Group of Seven, as Royal Bank of Canada economist Laura Cooper noted in a recent study.
(And you can certainly read outstanding in more ways than one.)
She cited the fact that we owed $1.67 for each $1 of income by the third quarter of last year, the same quarter as the BIS measurement.
“Interest rates are expected to rise gradually and still remain at historically low levels, but our estimates indicate debt servicing costs could rise to 16 cents for every $1 of income by 2018 from 14 cents currently,” Ms. Cooper said.
“This would represent a record high, with two-thirds of the increase attributed to rising interest payments as borrowing rates climb.”
For the record, Canada’s banks are deemed among the safest in the world, though have slipped a tiny bit in the World Economic Forum’s recent rankings.
GM sells Opel
France’s PSA Group is buying Opel from General Motors for €2.2-billion.
The takeover reshapes Europe’s car market overnight, putting PSA, which owns Peugeot and Citroen, into second spot behind Volkswagen, our European correspondent Eric Reguly reports.
What to watch for this week
In this era of heightened trade tensions after the election of Donald Trump, it will be interesting to see if Canada chalks up its third consecutive monthly trade surplus, as expected.
Statistics Canada releases that report Tuesday, and RBC expects it will show a slightly narrower surplus of $750-million for January.
“That would mark the third straight monthly surplus, which would be the best streak since oil prices collapsed in 2014,” said Bank of Montreal senior economist Benjamin Reitzes.
“We’ll be watching non-energy export volumes closely as usual, as they’ve fallen in three of the past four months,” he added.
“After adding bigly to Q4 GDP, we’re expecting a more neutral or slightly negative impact on Q1 growth.”
(Yes, Mr. Trump, he did say bigly, which auto-corrected to highly when I first typed it.)
Friday brings Canada’s monthly employment report. And, as always, forecasts are all over the place, anything from a loss of 20,000 jobs in February to a gain of 10,000.
Unemployment is believed to have held steady at 6.8 per cent.
“In Canada, forecasting the monthly jobs figures in the household (labour force) survey is hazardous to one’s health, but we’re due for at least a flat month after outsized recent gains,” said CIBC World Markets chief economist Avery Shenfeld.
At the same time, we get a U.S. employment report expected to show a gain of about 185,000 jobs and an unemployment rate of 4.7 per cent in February.
Markets will be watching closely because it comes in advance of the March 15 decision by the Federal Reserve, which has signalled it could well raise its benchmark rate.
There’s some overseas action, as well, starting on Wednesday with the U.K. budget, which takes on added importance in this era of Brexit.
One day later brings a decision from the European Central Bank, which isn’t expected to change its key rate.
“The focus instead is likely to be on possible changes in language, with a number of voices since the last meeting calling for a change to the ECB’s forward guidance,” said observers at RBC.
“An updated set of staff macroeconomic projections, which are likely to see an upward revision to inflation estimates in particular, will add weight to those calls.”