How the global economy can impact Canada

The forecast for the global economy fluctuates more often than not. One day, we hear that China’s stock crash is causing impending doom, and the next we’re told that everything is just fine.

The International Monetary Fund (IMF) recently issued a warning about a weakening global economy. It says if U.S. rates rise, the developing world could see a plethora of corporate failures. And although the U.S. is doing better, its employment rates are steady – not growing – which means the economic superpower does not have the strength to pull the rest of the world out of a slump.

This is added to the emergence of a global credit bubble. The IMF and World Bank recently met in Lima, but rather than celebrating recovery and market successes, economic thought leaders discussed a massive credit bubble that spans over many nations.

Growth is slowing in emerging markets, such as Latin America, and it’s making investors wary. Corporate debt in emerging markets has increased from $4 trillion to $18 trillion – with most of that growth occurring after the crash of 2008. The IMF believes that corporate liabilities in emerging markets are double their equity. (Four years ago, they were equal.)

At home

Even if the financial climate here in Canada remains stable, that doesn’t mean it can’t be disrupted by a region or many regions having serious difficulties. And if the developed world – notably the U.S. and other strong economies, such as Canada – raise their rates, it can have serious consequences on emerging markets.

The best thing for smart Canadian investors to do is to not only pay attention to what is happening at home but keep an eye on what is happening abroad.

Canada has a good history of weathering global crises. In 2008, Canada’s economy fared better than most. More recently, we’ve been largely unscathed by the fallout from Greece. And we’ve been a beneficiary of trouble in Asia, as wealthy Chinese investors have turned to Canada as a safe place to keep their money.

In housing, variable and fixed mortgage rates are growing closer together, with only .53 per cent separating the two. If the Bank of Canada’s overnight rate rises, variable mortgage rates could close in on fixed mortgage rates, making fixed rates infinitely more desirable.

The good news, if you have a variable-rate mortgage, is that the BoC doesn’t seem to be in any hurry to raise rates. The opposite seems to be true: two rate cuts this year have eased Canadians’ mortgage burdens. And the major banks have only passed a portion of those rate cuts on to consumers, so there’s a good chance you won’t feel the pinch as much when rates start to trend higher.

As interest rates in Canada and across the world continue to jump around, so too will mortgage rates. And while this is quite difficult to predict, it’s important to keep a watchful eye on global markets, to be sure to make the right decisions in your own backyard.

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