As just-published report updated our view on the Canadian economy and the critical issue of its excess leverage, particularly household debt and the related housing bubble. Canada’s boom has lasted far longer than the U.S. and euro area booms of the 2000s, and the country now has significantly higher debt burdens, courtesy of the “free money” era.
The day of reckoning approaches, as Canada is witnessing the worst inflation in 40 years and the BoC is belatedly responding. Home sales are slowing as mortgage rates rise, and prices have stopped rising vertically. If the BoC really wishes to return inflation to previous low levels, then it will likely trigger a deleveraging phase, with acute economic pain down the road.
For global investors, the issue is whether problems in smaller economies such as Canada can have meaningful global contagion, in direct economic terms and, possibly, via financial market contagion. Stay tuned.