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Business Briefing Why so many Canadians could be in so much trouble in an economic shock (notably in B.C., Ontario)

Briefing highlights

  • Bank of Canada on debt
  • Stocks, loonie, oil at a glance
  • Canada, U.S., Mexico reach tariff deal
  • SNC cancels sale of highway stake to OMERS
  • Trump delays auto tariff decision
  • Amazon takes stake in Deliveroo
  • Deere cuts outlook amid trade war
  • Required Reading

Easing but high

Fears over consumer debt may be easing somewhat, but it’s worth noting that a lot of Canadians could still find themselves in a lot of trouble in an economic shock, notably in British Columbia and Ontario.

The Bank of Canada certainly thinks it’s worth noting, flagging high household debt levels as an ongoing concern.

“Over all, the vulnerability associated with high household indebtedness remains significant, although it has declined modestly,” the central bank said in Thursday’s review of the financial system.

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“As households adjust to changes in mortgage policies and past increases in interest rates, the pace of borrowing has slowed and the quality of new mortgages has improved,” it added.

“Nonetheless, a large amount of debt in Canada is held by highly indebted households.”

Provincial measures in B.C. and Ontario have helped cool bubbly housing markets in the Vancouver and Toronto areas. And, most importantly, mortgage-qualification stress tests, which came into effect in early 2018, have helped slow and improve lending.

Also worth noting is that the percentage of Canadians who can’t keep up with their debts is low and stable, the Bank of Canada said.

“Outside of the oil-producing provinces, the percentage of households that have fallen behind by 60 days or more on at least one of their payments remains stable at about 3 per cent,” the central bank said.

“Alberta and Saskatchewan, however, show a small but steady increase beginning in 2015 after the oil price shock,” it added.

“The impact on the Alberta economy of ongoing adjustment in the oil sector is compounding an already difficult situation for some households.”

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Key to the credit picture is the level of high indebtedness.

Indeed, about 11 per cent of households are juggling a debt-to-income ratio that tops 350 per cent. And collectively, they account for about two-fifths of outstanding credit, or more than double what they represented in 1999, the Bank of Canada said.

“The wealth of these households is especially dependent on housing assets,” according to the central bank, and you can see that when you look at indicators across the various regions.

Source: Bank of Canada

The Globe and Mail

“Households in British Columbia and Ontario have the highest median net worth, and their net worth is more concentrated in housing,” the central bank said.

“These provinces also have the most pronounced imbalances in their housing markets, partially due to investor activity, and are the most indebted as measured by the ratio of household debt to income,” it added.

The financial system review is a document that “should give us a bit of a scare,” said Toronto-Dominion Bank senior economist Brian DePratto.

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While the situation has been improving, you can’t just undo the threat of swollen debt levels with a snap of the fingers.

“High household debt and housing market imbalances (among others) remain important vulnerabilities to the Canadian financial system,” Mr. DePratto said.

“These vulnerabilities on their own may not be enough to swing the business cycle, but will worsen outcomes in the event a trigger becomes reality, such as an external shock sending Canada into an economic downturn.”

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Markets at a glance

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Tariff deal struck

The U.S., Canada and Mexico have reached a deal to lift the Trump administration’s steel and aluminum tariffs within the next 48 hours, ending a nearly year-long continental trade war, The Globe and Mail’s Adrian Morrow and Lawrence Martin report.

Under the terms of the agreement, the U.S. will lift its tariffs of 25 per cent on steel and 10 per cent on aluminum within two days, while Canada will drop its retaliatory tariffs.

The countries will also end all World Trade Organization litigation related to the dispute. In exchange for the end of the tariffs, Canada will help the U.S. clamp down on steel and aluminum from China and other countries being sent to the U.S. through Canada.

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Ticker

SNC sale hits snag

From The Canadian Press: SNC-Lavalin Group Inc.’s sales of a Highway 407 stake to OMERS has hit a snag as partners fight over the interest. SNC-Lavalin cancelled the sale of part of its stake to OMERS, it said, as the Canada Pension Plan Investment Board, which already owns a 40 per cent stake, exercised its right of first refusal. Cintra Global S.E., a Spanish company that also owns part of the highway, has also sought to exercise its right of first refusal, but SNC disputes its ability to do so under the circumstances. The dispute is headed to the Ontario Superior Court with a hearing set for June 21.

Trump delays car tariff decision

From Reuters: President Donald Trump is delaying a decision by up to six months on whether to impose tariffs on imported cars and parts to allow for more time for trade talks with the European Union and Japan. Mr. Trump directed U.S. Trade Representative Robert Lighthizer to pursue negotiations and report back within 180 days. He has said that some imported cars and trucks have weakened the U.S. economy and threaten to harm national security.

Amazon takes stake in Deliveroo

From Reuters: Amazon has taken a stake in British online food delivery company Deliveroo, leading a US$575-million fundraising to pit itself against Uber Eats in the global race to dominate the market for take-away meals.

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Deere cuts outlook

From Reuters: Deere & Co. reported a lower-than-expected quarterly profit and cut its full-year outlook, as the U.S.-China trade war threatens to hit U.S. exports of key commodities, hurting farm incomes and demand for Deere’s equipment.

Tech giants fall short on fake news: EU

From Reuters: Facebook, Google and Twitter are still not doing enough to tackle fake news plaguing the election campaign to the European Parliament, the European Commission said in its latest report.

Required Reading

Competition fears

Transat A.T.’s decision to enter into exclusive talks to be taken over by Air Canada is raising worries that travellers will pay higher ticket prices if the rivals merge, Nicolas Van Praet writes.

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Ottawa plans digital charter

Canada plans to introduce regulations for online platforms that will include financial penalties for the spread of misinformation, having signed a global pact to address violent speech on the internet. Tamsin McMahon and Bill Curry report.

Canada to get first e-sports ETF

Video game enthusiasts looking to take their investments to the next level may soon be able to with Canada’s first global e-sports exchange-traded fund, Clare O’Hara writes.

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