Canada, the world’s 11th-largest economy, will see a debt crisis and ensuing recession within one to three years, says a leading economist. This will likely impact the Canadian dollar.
Steve Keen, a professor of economics who writes for Forbes, pointed to Canada as one of seven countries in the world that will face that crisis, along with China, Australia, Sweden, Hong Kong, and Norway. (Source: “The Seven Countries Most Vulnerable To A Debt Crisis,” Forbes, March 27, 2016.)
The crisis is likely to hit these countries because private and public credit growth is overshadowing gross domestic product (GDP) growth, the Australian-born British commentator argued.
Keen believes the U.S.—the world’s largest economy—recovered from the 2008 financial crisis when GDP growth started to overpower credit growth. He sees private debt in all seven countries exceeding 1.5 times GDP and is rapidly growing debt over a period of about five years.
Debt service ratios from all sources, government and private, exceed 175% of GDP in Canada. Provincial government debt has mounted in recent years, while the federal government just released a budget that expands the deficit and will result in more debt at the federal level.
As of the fourth quarter of last year, Canadian households on average held $1.65 in debt for every dollar of disposable income, according to Statistics Canada. (Source: “Canada’s debt-to-income ratio sets new record high at 165%,” CBS News, March 11, 2016.)
But Keen, who is a long-time critic of conventional economic thought, failed to precisely predict when these countries will have their recessions “because it depends on when the private sector’s willingness to borrow from the banks—and the banking sector’s willingness to lend—stops.” (Source: Forbes, op cit.)
“This can be delayed by government policy—as it was in Australia in 2008, via a strong government stimulus, the restarting of the housing bubble by a government grant to first home buyers, and the boom in investment and exports set off by China’s own stimulus program,” Keen wrote. (Source: Ibid.)
“But the day when credit growth stops can’t be put off indefinitely,” he added. “When it arrives, these countries—many of which appeared to avoid the worst of the crisis in 2008—will join the world’s long list of walking wounded economies.” (Source: Ibid.)
En route to the 2008 financial crisis, the U.S. Dollar Index weakened to 70 from its 2002 peak of 120. The U.S. greenback has now recovered, hitting 100 last December.
A recent oil price rally has helped the Canadian dollar strengthen 13% to $0.77 since the CAD to USD hit a low of $0.68 on January 20. However, the loonie is still eight percent below its one-year high of $0.83. The Canadian dollar was at par with the U.S. dollar in 2013.