Can Canada go into recession without U.S.? BCA said yes


The Canadian economy will soon experience something it has never faced in 68 years: a recession without the US on the same ship.

That is the view of Jim Mylonas, global macro strategist at BCA Research Inc. in Montreal, a company that has made market and economic calls since 1949. Mylonas said a surge in household debt combined with a rate hike would push the Canadian economy into recession, even as the US economy continues to grow.

"I think we're just on the cliff of starting a serious recession," Mylonas said in an interview from Bloomberg's office in Toronto. "It's not a problem if, but when."

For Mylonas, the irony is that very strong growth in the US this year can push Canada beyond the limit. The expansion will force the Federal Reserve and Bank of Canada Governor Stephen Poloz to raise rates, he said. Debt-laden Canadian consumers are not prepared to handle higher borrowing costs, unlike their U.S. counterparts. reversing loans after the fall of housing a decade ago.

For Mylonas, good news in the US may be bad news for Canada.

"If the US economy is relatively good and the Fed raises rates, it is very difficult for the Bank of Canada to just survive and not follow the Fed," Mylonas said. "We are now at the point where Bank Canada will flirt with triggering the next recession if not."

If Mylonas is right, this will be the first since 1951 Canada to slip into recession without the US also experiencing a contraction.

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The fate of Canada's economy has always been closely linked to its neighbors in the south, aiming for around one third of its exports. U.S. Economics has reduced its imbalance after triggering the worst credit crisis in almost a century, led by a fall in real estate. In Canada, which largely avoids destruction, companies and consumers have accumulated debt since then, said Mylonas.

The debt to disposable income ratio in Canada rose to 175 percent at the end of September, from 137 percent in 2006, before the start of the financial crisis. In contrast, US household debt to disposable income is below 100 percent in September, the lowest since 2001, according to data compiled by Bloomberg. Even at its recent peak, U.S. ratio never exceed 140 percent.

"In the 10-year period in which the US went on a diet, became healthy, Canada ate a party of junk food, which is a debt," Mylonas said, adding a medical analogy. "Finally you go to the doctor and the doctor says," Sorry, you have to cut junk food. & # 39; It hurts. "

The Canadian housing market has already shown early signs of fatigue, with home sales declining last year to the lowest level since 2012, according to the Canadian Real Estate Association. The number of consumers seeking debt relief jumped 5.1 percent in November from a year earlier, the Ottawa-based Bankruptcy Supervisory Office reported on January 4.

"If debt becomes disposable income will increase from 180 to 130, then the recovery will look much more like the US, so shallow and long," Mylonas said.

Without recession

To be sure, most economists and Bank of Canada do not call for recession in the near future. Opportunities for recession over the next 12 months are around 20 percent, according to a Bloomberg survey of 10 analysts released January 11. Earlier this month, the central bank cut its 2019 growth forecast to 1.7 percent, while increasing its estimate for 2020 to 2.1 percent. Opportunities for U.S. recession slightly higher, at 25 percent, based on 49 estimates.

Investors certainly do not behave as if contractions are near. The Canadian dollar has gained the most among the G-10 currencies this year, while the main equity index has jumped 7 percent, the best start for a year since 1980.

The trader is not banking in a close rise by Poloz, who worked at BCA Research in the 1990s. The chance for a rate hike in May reached around 30 percent, according to trading futures contracts.

"If the Bank of Canada does not raise in line with the Fed, the reason it does not raise may be rooted in bad news," such as weak economic growth, Mylonas said. "If that's the case, then my thesis for Canada will play faster than most think."

– With help from Erik Hertzberg and Kristine Owram.


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