U.S. trade war risks Canadian progress on financial stability, says Bank of

The financial picture for Canadian households and businesses was showing signs of increased health until the United States started a trade war, the Bank of Canada said on Thursday.

The central bank says in its latest Financial Stability Report that at the start of the year, households had, on average, less debt relative to their income than a year earlier, while insolvency filings by businesses had dropped significantly.

“The country’s financial system has faced unprecedented shocks in recent years, and it has proven resilient,” said governor Tiff Macklem in prepared remarks on the report.

“But proactive steps taken by households and businesses, together with substantially lower interest rates, put the system on a more resilient footing heading into 2025.”

However, the U.S.-instigated trade war has pushed risks higher overall, said Macklem.

“The Canadian economy and financial system face a new threat. U.S. trade policy has taken a dramatic protectionist shift. Tariffs and uncertainty have sharply reduced prospects for global economic growth,” he said.

“A long-lasting trade war poses the greatest threat to the Canadian economy,” he said, warning about both near-term market volatility and more medium-term risks of a prolonged trade war, including reduced growth and increased unemployment.

Mortgage holders could fall further behind if tariffs last

There’s tremendous uncertainty as to the future direction of tariffs, but in a scenario where they remain for some time, the Bank of Canada sees the potential for Canadians to fall behind on mortgage payments at levels not seen in a generation.

In its scenario, which the central bank emphasizes is not a forecast, an extended trade war could cause mortgage arrears to top 0.5 per cent — higher than what happened during the 2008-09 global financial crisis, though still below the more than 0.6 per cent seen in the 1990s.

Government supports could help lessen the impact, but it’s not yet clear how widely or generously those might be.

A stress-test scenario on Canada’s financial system by the International Monetary Fund, included in the bank’s report, uses a more extreme scenario. While the Bank of Canada’s own risk scenario sees a recession lasting four quarters, which is roughly in line with the 2008-09 and the 1990-91 recessions, the IMF scenario tests against seven quarters.

Under its scenario, the IMF saw the potential for GDP to fall 5.1 per cent, unemployment to peak at 9.2 per cent, house prices to drop 26 per cent and equities to fall 36 per cent, peak to trough.

The potential…