- Our most recent Canadian QEF builds in mild recession in Europe and continued financial market volatility due to European sovereign debt concerns. However, in recent weeks, risks of a disorderly Greek exit from the Euro zone have increased. In this report, we highlight what the worst case sce- nario would look like for the Canadian economy.
- Canada has little direct exposure to Europe and the real economy would be hit more significantly through indirect channels. The event would lead to financial market turmoil and commodity prices would tumble.
- High household debt and an overvaluation in the existing home market leave the economy more vulnerable to a negative external shock than it has been in the past.
- In a worse case scenario, where there is a systemic crisis in Europe, Canada’s economy would endure a severe recession, with the decline being substantially worse than that experienced during the 2008/2009 recession.
What separates Canada from other major advanced economies, however, is its high and rising vulnerability to domestic financial excesses that have formed in recent years. While corporate balance sheets remain strong, household debt has become excessive and the housing market is in our view 10-15% overvalued, leaving households more vulnerable to a negative economic event. A global financial crisis could be a major catalyst for a sharp housing market correction and household deleveraging – albeit to a lesser extent than was evident in the U.S. during the past recession. Moreover, Canadian governments would have less room to stimulate compared to the first crisis in 2008-2009... In a worse case scenario, the Canadian economy would likely endure a severe recession, with the decline being substantially worse than that experienced during the recent recession as both exports and domestic spending contract heavily.Now if you were a Chinese investor who had parked money in some Canadian real estate... do you consider bailing right about now to protect your financial assets?
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