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Canada’s Economy: Strong Banks, Vulnerable Consumers

We believe Canada’s banking sector is more insulated from some of the issues facing the U.S. banking system, and as a result, credit conditions in Canada may tighten less than in the U.S.

Higher interest rates are contributing to slower growth and activity in much of the developed world, and Canada’s economy appears particularly sensitive to these higher rates, especially relative to the U.S. This is largely due to Canada’s housing market, where short-duration and floating-rate mortgages are prevalent (versus the typical 30-year fixed rate mortgage in the U.S.), meaning the generally highly levered Canadian households quickly felt the squeeze of higher rates starting in 2022.

Though the Canadian economy has slowed – and we expect this to continue, with modest recession more likely than not – the potential upsides of its market structure are also becoming clear. Inflation is moderating back toward target in Canada more quickly than in most other developed market (DM) economies. Meanwhile, the shorter-duration nature of the mortgage market appears to be a strength for Canadian banks relative to their U.S. counterparts, some of whom have come under significant stress this year amid unrealized losses on their (generally longer-term) assets along with a rising cost of deposit funding. Together, these trends suggest that the interest rate sensitivity of the Canadian economy may be a benefit in the medium term, potentially helping inflation return to target more quickly while enabling a soft(er) landing than we may see in the U.S.
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The Author

Vinayak Seshasayee

Portfolio Manager, Generalist

Allison Boxer

Economist

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