Growing Fears About Canada’s Private Sector Financial Deficit – A Key Indicator Of Crisis Risk

The U.S., Eurozone, and Japan all have substantial private sector surpluses. But in Canada, it’s a very different story.

The are growing fears about Canada’s private-sector financial deficit.

As noted by Bloomberg, “The private-sector financial balance — an economy’s total income minus the spending of all households and businesses — has proven more powerful in predicting crises than the current-account balance, Goldman analysts led by Jan Hatzius, the bank’s global head of economics, wrote in an Aug. 23 research note.”

The analysts said “The good news is that the biggest DM economies — the U.S., the Euro area, and Japan — are all running healthy private sector surpluses. The not-so-good news is that some of the smaller DM economies — especially Canada and the U.K. — are running sizable deficits and appear vulnerable to higher interest rates and weaker asset markets.”

This private sector deficit makes Canada vulnerable, because it means “households and firms can’t finance their spending with current income and rely on net borrowing or asset sales. That makes growth and financial stability more vulnerable in an environment of rising rates or market declines.”

Disturbingly, the analysts say a large private-sector deficit is a key indicator of a crisis, because it makes an economy more vulnerable if the market goes down, or interest rates rise.

As I’ve said before, this is no surprise. The combination of allowing massive amounts of foreign money to enter our housing sector driving up prices beyond affordability for many Canadians, along with restrictions on where homes can be built (which is meant to reduce ‘sprawl’ but ends up restricting supply), and policies that take more money out of our pockets and make things more expensive (carbon tax), have the predictable impact of making people rely more on debt to maintain their standard of living.

And those same policies are terrible for Canadian businesses as well.

More debt = more vulnerability, and that’s not even including the rising threat from Canada’s evaporated NAFTA negotiating leverage and the billions in investment fleeing our country under the Trudeau government.

Spencer Fernando

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