BUSINESS

Risk Of New Financial Crisis Growing, And Canada Is In Crosshairs

10/02/2014 01:20 EDT | Updated 10/02/2014 01:59 EDT
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The world is facing a “poisonous combination” of low economic growth and low inflation that could cause another financial crisis, according to the latest Geneva Report on the World Economy.

And the nature of this crisis, should it materialize, would likely give Canada front row seats to the economic carnage.

Although governments and consumers in many countries are working to lower their debt levels, there’s been a spike in borrowing in some countries, particularly in Asia, and total global debt levels continue to hit new highs, the 16th Geneva Report states.

The report, whose authors hail from Morgan Stanley, the London Business School and other institutions, worries that the global economy isn’t growing fast enough for debtors to get out from under the $158.8 trillion in debt currently outstanding worldwide.

Total global debt has shot up to 212 per cent of global GDP, from 180 per cent of GDP in 2008.

“Some nations that avoided the direct effects of the financial meltdown have recently built up excesses that raise the odds of a home-grown crisis,” the report stated.

The report singles out Asia as the region where the problem is most acute, but many analysts argue Canada is in this club as well.

A report earlier this year from the Bank for International Settlements identified Canada as one of a handful of countries where “early warning indicators” of a financial crisis are flashing.

Credit in Canada is growing about 5.6 per cent faster than it should be, BIS estimated, placing Canada at risk of what some economists call a “deleveraging shock.”

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Consumer Debt Per Person (2014)

Canada’s recovery from the financial crisis was debt- and consumer-driven, with low interest rates spurring on a hot housing market. That, in turn, has driven a spike in consumer debt.

Household debt in Canada is sitting near a record high above 163 per cent of household income. Debt levels, as a percentage of income, have doubled in Canada since the late 1980s.

And though evidence is growing that Canada is finally seeing a turnaround to an export-led recovery (which was the norm in previous recessions), many experts worry about the overhang from that debt load.

Not everyone is worried about another financial crisis. Many analysts say so long as Canadian interest rates remain low, those higher debt burdens will continue to be affordable.

A debt crisis would hit Canada’s banks especially hard, and there is little evidence to suggest Canadian banks are unstable.

The latest ranking of the world’s strongest banks from Bloomberg placed three Canadian institutions (Desjardins, CIBC and RBC) in the top 20.

The Geneva Report urges central banks to do what they can to keep long-term interest rates low. It wants to see more “quantitative easing,” the practice of central banks buying government debt in order to keep interest rates low.