The US debt ceiling and the Canadian economy
by Taya Weiszhaar, TMG Mortgage Broker
After weeks of negotiation, the U.S government has voted to raise its $14.3 trillion debt ceiling to continue to pay its bills. The plan calls for a debt ceiling increase of between $2.1 trillion and $2.4 trillion with at least $2.1 trillion in debt reduction through spending cuts, which falls lower than Standard & Poor’s recommendation of $4 trillion in debt reduction.
If the US government had not reached an agreement and gone into default, the country may have gone into severe fiscal shock. Within 30 days the government would have to choose which obligations to pay first. Its debt rating would have been cut, which would have driven up yields and increased fixed mortgage rates.
For Canadians, the impact might have been this: Our interest rates could have followed. And because Canada is such a huge trading partner, our own economic outlook could have been downgraded. The value of our dollar in comparison to the US could have gone much higher, thus putting the brakes on our economy.
I say “could” because in comparison to the US, our economy seems to be less volatile. It is on solid footing because of our fiscal policies. Bottom line: our economy is stable.
Recently, Canada maintained its triple-A credit rating, Moody’s top credit rating, and one Canada has maintained since 2002. Moody’s stated that Canada has a “high degree of economic resiliency, very high government financial strength and low susceptibility to risk.”
Because of our economic position, the US debt ceiling increase will have a limited negative impact on Canada. One of those limited impacts could be the US spending cuts as agreed to as part of the debt ceiling solution, which could have implications for Canadian companies with large dependencies on US trading. And bond yields in the US will increase in the short term if ratings agencies deem the debt plan too risky.
As for our bank lending rates (prime) and mortgage rates, these will not be impacted by the debt ceiling plan. The Bank of Canada has stated that rates may start to increase later this year, which will affect variable rate mortgages and bank rates. However, the value of the Loonie may but back interest rate increases to later in 2011 or early 2012.
Canada’s employment is at 7.4 percent. The country’s gross domestic product is expected to grow at close to 3 per cent during 2011 despite the recent slowdown. We have a balanced market and a proactive government with a highly admired fiscal policy. All-in- all Canada has tolerated the global economic crisis well and has created a stable economy with good potential for continued growth.
About The Mortgage Group Canada Inc.
TMG Canada is an innovative and progressive mortgage brokerage company. With mortgage professionals serving 9 provinces and 3 territories, TMG is national in its reach helping Canadians navigate their unique mortgage options with over 50 lenders. TMG has a network of more than 800 mortgage brokers and agents and has helped more than 200,000 Canadians arrange their mortgages in the past 20 years.
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