Bank of International Settlements Flags Canada for a Financial Crisis Next Year

by Daniel Wong

The Bank of International Settlements (BIS) released its fall quarterly report recently. In it, they expressed concern about Canada’s debt-to-GDP gap, which is used to measure the stability of the local banking system. The organization has flagged Canada for a financial crisis as early as next year.

Bank of International Settlements Flags Canada for a Financial Crisis Next Year | BullionBuzzThe credit-to-GDP gap is an accurate indicator used to monitor where the next financial risks will occur in the world. It’s accurately predicted the relatively recent and financial turmoil in the UK and the US, as well as a few other economies. Generally speaking, any time a country’s credit-to-GDP gap is higher than 10% for three years, a banking crisis follows (along with a recession). Canada has now been in that territory since 2015, and there’s no sign that Canadians are going to have a sudden windfall to correct it.

Canada approached a dangerously high credit-to-GDP gap, and then kept going. The BIS’s latest quarterly shows that Canada’s credit-to-GDP gap is now at 17.4%, which is way above the 10% warning threshold. China is the only other major economy with a higher ratio, although their GDP is growing at three times the rate of Canada’s.

Canada’s addiction to real estate speculation has driven Canadian consumers to record amounts of debt. As of December, discretely released numbers from the Bank of Canada show that Canadians have $2 trillion in consumer debt. A whopping 71.6% of the debt was mortgages, which Canadians have been piling into as they chased soaring real estate prices. BIS’s credit-to-GDP analysis shows that large binges of debt like this are followed by proportionally large recessions.

Now that Canada has been flagged for a recession next year, it’ll be interesting to see how Canadians respond. Will they abstain from further binging, or are they too busy shopping for new homes to hear the warnings?

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