06/11/2015 10:43 EDT | Updated 06/11/2016 05:59 EDT

Risks To Canada's Economy Are On The Rise, Bank Of Canada Warns

Bloomberg via Getty Images
Stephen Poloz, governor of the Bank of Canada, speaks during a press conference in Ottawa, Ontario, Canada, on Wednesday, Jan. 22, 2014. Poloz kept his main interest rate unchanged and said the direction of his next move will depend on the economy's evolution. Photographer: Cole Burston/Bloomberg via Getty Images

OTTAWA - The still-uncertain fallout from the steep drop in oil prices has left the country's financial system more vulnerable to any significant economic shocks to employment and incomes, the Bank of Canada said Thursday.

In its latest financial system review, the central bank said the oil slump on its own is unlikely to set off considerable systemic stress and the probability of a severe recession remains low.

But it warned that the weak spot made worse by cheaper crude has put the Canadian system more at risk to any event that would lead to widespread job losses and falling incomes.

The consequences would reduce the ability of Canadians to service their rising debt loads and could set off a widespread housing price correction, the bank said in its semi-annual review.

The central bank listed the country's climbing level of household debt and its persistently overvalued real estate market as key vulnerabilities in the financial system.

"Although house price growth on a national basis has slowed modestly, it continues to outpace income growth," the bank said in the review.

"The vulnerability associated with household indebtedness remains important and is edging higher."

The review also pointed to particular weaknesses in the crude-producing region of Alberta, where it says the proportion of highly indebted households is among the highest in Canada.

The central bank, however, also says financial reforms underway in Canada and abroad have put the Canadian system on better footing to absorb economic shocks.

"While risks may have edged higher, safeguards to protect the financial system are stronger than they were before," Bank of Canada governor Stephen Poloz said in a statement.

The review follows a recent data release that revealed the economy had contracted in the first three months of this year at an annualized rate of 0.6 per cent — a dismal figure worse than the central bank's prediction of zero growth.

That first-quarter slide in real gross domestic product, a measure of economic growth, was blamed in large part on the oil price collapse, the failure of other sectors to pick up the slack and weaker-than-expected growth in the United States.

In Thursday's review, the bank reiterated its projection that GDP would bounce back in the coming quarters with help from an expanding U.S. economy.

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