3 scary economic tales
It’s that time of year again. Time for skeletons, ghouls and ghosts to wander the streets and blood-curdling stories to be told in front of a flickering fireplace.
I don’t have a skeleton costume to wear but I do have three scary stories that may send you to bed with nightmares, if you’re brave enough to read them. Are you ready? Here goes.
Donald Trump wins the U.S. election.
I know it seems improbable right now but so did a Leave Europe vote in Great Britain and we all know how that turned out. For Canadians, a Trump presidency would be an economic and political disaster (to use one of Mr. Trump’s favourite words). His virulent condemnation of NAFTA (“worst trade deal in history”) threatens to undermine our relationship with our major trading partner — the U.S. takes about 75 per cent of our exports. And this at a time when a new free trade deal with Europe is falling apart because of the objections of tiny Wallonia.
It’s not just NAFTA that is in Trump’s crosshairs. He wants to impose massive tariffs on imports from China and any country he sees as a threat to U.S. manufacturing. That would lead to retaliation from the targeted countries that would be reminiscent of the devastating trade wars of the 1930s.
If all that isn’t frightening enough, imagine the Trudeau government in Ottawa trying to deal with a Trump administration in Washington. The two would be light years apart on every issue from cross-border security (we want less, they want more) to environmental protection (they want less or none, we want more). Relations between the two capitals would quickly turn colder than a January night in Iqaluit.
The Bank of Canada lowers interest rates.
OK, so why is that a scary story? Low interest rates are good for everyone, right? No! If our central bank feels the need to slash rates again it will be because it sees our economy as going down the drain and is thrashing around desperately to try and stop the bleeding. Governor Stephen Poloz and his associates have already cut their estimated GDP growth rate for this year to only 1.1 per cent, with a 2-per-cent target for next year. Those are anemic numbers. Anything worse would be teetering on the edge of recession.
Low interest rates also encourage more borrowing, increasing the probability of financial meltdowns for overextended families when rates eventually turn back up. And anyone contemplating a winter vacation in the sun will have to budget more for the trip because a lower bank rate will drive down the value of the loonie even more, perhaps to the 70-cent range. A collapse in the housing market. This is the scariest story of all. It could end up with thousands of people losing their homes — a Canadian repeat of the U.S. housing collapse of 2007-09. Don’t think it can’t happen here.
This month, Canada Mortgage and Housing raised its risk rating on the national housing market to Strong, from Moderate previously. It’s the first time CMHC has issued a “red” signal for the country’s housing market as a whole.
Governments are urgently trying to cool the hot markets in Vancouver and Toronto, but latest indications are the overheating is extending to other parts of the country. The newly imposed “stress test,” which is aimed at ensuring home buyers do not overpay for homes they won’t be able to afford if rates rise, is part of that tough new approach. But it may be too late; many thousands of people already have mortgages they won’t be able to handle if rates increase.
Back in the early 1990s, economist Jeff Rubin predicted housing prices in Ontario would fall by 25 per cent. Everyone laughed. House prices only went up, not down, they said. Well, he was right. The housing market did crumble, in fact it ended up dropping 30 per cent. Many people lost a lot of money, including a couple of my friends who had bought condos on spec, using mortgage money. A similar situation happened in Alberta at about the same time. That ended with hundreds of people walking away from homes that were under water, no longer worth the value of the mortgage they carried.
On that terrifying note, happy trick or treating! Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. His website is www.BuildingWealth.ca