Mario Draghi’s Threat to Canada

The Week Ahead

May 22, 2018

If that title gave you pause, it should have. How could the European central bank head pose a threat to Canada? Canada’s trade is still heavily tilted to the US. European governments, let alone its central bank, aren’t counselling Trump-style protectionism. But financial market linkages, some of which appear to operate with more force than theory would suggest, imply that decisions taken in Frankfurt could have a significant bearing on Canada’s economic fortunes.

We’re not talking about a risk that the ECB tightening takes Europe into recession, and thereby stalls global growth in the process. That seems unlikely given how tame in ation has been in the Eurozone thus far. But even a very gradual move away from aggressive monetary ease, one that still leaves the Eurozone chugging along at its modest trend growth rate, will have spillover impacts for Canada through financial markets.

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Should We Lose Sleep Over Rising Corporate Debt?

The Week Ahead

May 14, 2018

The focus is mostly on ever-rising household debt, but behind the scenes, with less drama, corporate Canada has been piling up debt even faster. Non- nancial corporate debt has risen by an average annual rate of just under 9% since the beginning of the recovery—3%-pts faster than the growth seen in household debt. The corporate debt- to-GDP ratio currently stands at 70%—up from 50% in 2010.

Of course everything is fine and well— until it isn’t. So should we lose sleep over corporate debt? The fear of course is that higher interest rates will expose the vulnerability of highly indebted corporations, and will put at risk the current dividend growth trajectory—mainly in high-yield sectors such as utilities, that happen to see their debt load rising the fastest.

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