In its latest Financial System Review released today, the Bank of Canada says the country’s economy showed signs of improvement earlier this year, but is now facing its greatest threat to financial stability and economic growth—a trade war driven by U.S. protectionist policies.
Governor Tiff Macklem warned that escalating trade tensions, particularly under the influence of former U.S. President Donald Trump’s trade agenda, combined with global uncertainty, are dampening growth prospects and increasing the risk of a prolonged recession and widespread job losses in Canada.
A worst-case scenario outlined in the report suggests that if the trade conflict persists, the share of Canadians falling behind on mortgage payments could exceed 0.5%, surpassing levels seen during the 2008–2009 financial crisis.
The Bank highlighted that heavily indebted households, especially those without mortgage debt, are at highest risk of default. Delinquencies on credit cards and auto loans have already risen above historical averages. While Canadian banks remain well-capitalized and liquid, they could tighten lending if credit losses increase, worsening the economic slowdown.
The Bank also raised concerns over the growing role of hedge funds in Canada’s government bond market. Many of these trades are debt-leveraged, meaning a wave of redemptions or financial stress could trigger sudden capital flight, destabilizing markets.
Although recent interest rate cuts have helped reduce debt burdens and lower business bankruptcies, the Bank cautioned that if the economy deteriorates sharply, both households and businesses—particularly those with high debt and weak financial positions—would suffer significantly.
Nevertheless, the Bank of Canada stressed that the financial system remains resilient, supported by strong capital buffers, prudent lending practices, and recent rate reductions.
Governor Macklem concluded: “We still don’t know how tariffs will evolve or how long they will last. That’s why it’s critical to stay vigilant in the face of rising risks.”
