Banking turmoil amplifies the sense of a looming economic ‘precipice’. What’s next? – National
The collapse of Silicon Valley Bank and the resulting impact on financial institutions in the United States and Europe this week are adding to the sense of a looming economic “chasm,” experts say.
While they see no sign of trouble for Canada’s banking system so far, they add that Canadians are likely still feeling the sting of the broader crisis, on top of existing stressors like inflation and high interest rates, along with rising food costs and gas.
“I think there’s just a sense that we’re getting closer to that chasm where something’s going to break,” Kevin Page, president and CEO of the Institute of Fiscal Studies and Democracy and former Parliament Budget Officer, told Mercedes Stephenson The West Block Sunday.
That could mean a recession or at least a “significant economic slowdown,” he added, although it remains to be seen whether it will be a softer landing than during the 2008 financial crisis.
“I think it’s a global problem,” Page said. “Either way, I think we’re going to feel it.”
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Credit Suisse and First Republic are the latest banks under threat. What’s up?
Last week saw dramatic market turmoil after mid-tier US lenders Silicon Valley Bank and Signature Bank imploded, amid reassurances from world leaders and policymakers that the global banking system was safe, fears of broader industry troubles were not could appease.
Major US banks have had to step in with a $30 billion lifeline for smaller lender First Republic, while all the country’s banks have requested record liquidity of $153 billion in combined emergency liquidity from the Federal Reserve in recent days.
In Europe, Credit Suisse was forced to draw $54 billion in Swiss central bank funds to shore up its own falling share price, becoming the largest bank mired in the crisis.
Both Credit Suisse and First Republic’s interventions did little to help as both stocks continued to fall into the weekend.
Lisa Raitt, a former Conservative MP and transport secretary who now serves as vice chair of global investment banking at CIBC, told Stephenson that Canada’s banking system is more diversified in its holdings than SVB and other smaller banks, giving Canadians confidence in their Deposits should be safe.
However, she noted the extraordinary speed at which waning investor confidence led to the bank run that sparked the broader upheaval, making it difficult to predict what might happen next.
“In the past, a bank run could last several hours, a few days, maybe a few weeks. In this case, it was almost instantaneous,” she said.
“That’s something we need to keep an eye on in terms of regulation and in terms of what’s happening in our banking sector.”
A growing sense of economic catastrophe comes as Treasury Secretary Chrystia Freeland is set to present the government’s latest budget on March 28.
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Canada’s federal budget for 2023 will be released on March 28: Freeland
Freeland’s office has reiterated the government’s commitment to “prudent financial management” in this year’s budget. That’s after saying in the November 2022 autumn economic statement that the government would “keep your powder dry” and set aside larger spending items for the spring budget.
Inflation has shown signs of cooling this year on the back of the Bank of Canada’s aggressive rate hikes. For the first time since it began raising lending rates last March, the Bank of Canada left its interest rate unchanged at 4.5 percent in March. Canada’s annual inflation rate has slowed to 5.9 percent in January from a peak of 8.1 percent in mid-2022.
Both Page and Raitt said the challenge for Freeland will be a budget that doesn’t reverse that trend, with too much relief for Canadians, while also addressing the needs of the future, from ongoing support for the war in Ukraine to Increasing competitiveness in the growth green economy.
“There’s no question the Canadians are injured… so there might be some relief,” Raitt said.
“(But) the difficulty with sending more checks and increasing the amount of money in people’s pockets, of course, is that they have more to spend. You can buy more. And that actually raises the possibility that inflation will continue for a while.”
Page said it is important that the government’s overall fiscal policy is consistent with monetary policy set by the Bank of Canada and works together to reduce inflationary pressures.
However, some spending that could be seen as inflationary may be unavoidable, he added, including pledged increases in healthcare spending and addressing NDP priorities like dental care to keep the supply and confidence deal with the Liberals alive.
That doesn’t mean the Liberals can’t break even within “the next three to four years,” Page said — assuming there’s a soft landing.
“It’s a complicated budget environment,” he said.
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