The Bank of Canada warned that a severe and long-lasting global trade war may cause more mortgage borrowers to fall behind on their payments — even beyond levels reached in the global financial crisis.
In its financial stability report published Thursday, the Canadian central bank said a prolonged trade dispute would reduce economic growth and increase unemployment.
Here are three charts looking at the potential chain reaction, from businesses facing increased financial difficulties to households struggling to pay off their debt after layoffs.
Signs of financial stress are currently concentrated among households without a mortgage: Their rates of arrears on credit cards and auto loans have risen from a year ago and are above their historical levels.
For households with a mortgage, rates of arrears remain below historical averages. Still, Governor Tiff Macklem said that if a large economic shock causes job losses, more households will struggle to keep up with debt payments.
The trade war is threatening jobs and incomes, particularly those tied to trade-dependent industries. Businesses that export a large share of their production to the U.S. and have higher leverage, low profitability and low cash reserves are particularly vulnerable to a long-lasting trade war.
Most of these firms are in manufacturing subsectors, including transportation equipment and primary metals.
Even though existing and new government support programs would likely help businesses and the economy in a prolonged trade war, some affected firms may still lay off workers as they adjust to lower demand.
Canadians who face a large reduction in income after losing their job could have trouble repaying their debt.
According to the bank’s simulations, the share of mortgages in arrears by at least 90 days could rise to a level comparable with — or higher than — those seen during the global financial crisis.
Randy Thanthong-Knight and Mario Baker Ramirez, Bloomberg News
