Canada’s financial progress faces rising risks as the U.S. trade war intensifies, warns the Bank of Canada in its latest stability report.
U.S. Trade War Threatens Canada’s Financial Gains
Canada’s financial outlook was improving — until the U.S. launched a trade war that now clouds the country’s economic future, the Bank of Canada warns.
Canadian Households Showed Progress Before Trade Tensions
At the start of the year, Canadian households and businesses were on a stronger footing. Debt-to-income ratios had improved, and business insolvencies were declining. According to the Bank of Canada’s latest Financial Stability Report, proactive efforts by households and lower interest rates had boosted resilience heading into 2025.
But Bank of Canada Governor Tiff Macklem now warns that rising trade tensions are reversing those gains.
U.S. Protectionism Pushes New Risks
“The Canadian economy and financial system face a new threat,” Macklem stated. He cited the U.S.’s sharp shift toward protectionist policies, tariffs, and global economic uncertainty as major challenges.
“A prolonged trade war poses the greatest threat to Canada,” Macklem emphasized, pointing to possible short-term market shocks and medium-term threats like slower growth and job losses.
Mortgage Arrears Could Hit Highest Level in a Generation
If tariffs persist, Canadians may fall behind on mortgage payments at rates not seen since the 1990s. While the Bank stresses this is not a forecast, its scenario shows mortgage arrears potentially topping 0.5% — higher than the 2008-09 financial crisis levels.
A more extreme stress test from the International Monetary Fund paints an even darker picture: a potential 5.1% GDP drop, 9.2% peak unemployment, a 26% decline in home prices, and a 36% plunge in equities.
A Stronger Start to 2025 Blunted the Shock
Despite these looming risks, the financial picture at the start of the year was surprisingly stable. Falling interest rates in 2024 reduced the pressure of mortgage renewals, with payment increases now expected to average 8% in 2025 and 5% in 2026 — far less than feared.
Homeowners have also benefited from rising incomes and property values, bringing household debt-to-income ratios down to 173% from 179% a year earlier.
Non-Mortgage Households Show Signs of Strain
While homeowners are faring better, non-mortgage households are facing mounting stress. The Bank’s report highlights a troubling rise in overdue credit card and auto loan payments, now above pre-pandemic levels.
Deputy Governor Carolyn Rogers noted that while mortgage holders remain below historical arrears averages, non-mortgage households are increasingly falling behind.
Businesses Hold Steady, But Trade-Exposed Sectors Vulnerable
Canada’s non-financial businesses remain in good health, and the sharp rise in insolvencies after pandemic support ended was short-lived. Still, around 15% of bank loans are tied to trade-sensitive sectors, making them vulnerable to prolonged economic disruptions.
Canadian banks, however, are well-positioned with robust capital buffers and provisions for potential credit losses.
A Call for Vigilance Amid Uncertainty
Macklem emphasized the uncertainty ahead: “We don’t know what tariffs will remain, whether they’ll be reduced or escalated, or how long this will last.”
While Canada’s financial system has shown resilience, the Bank of Canada stresses the need for continued vigilance as global tensions rise.
