In the days following the closure of three technology focused lenders in the United States, Manulife Investment Management, in its most recent report for institutional readers and clients, says so far, the contagion to Canada’s financial system appears limited.
The report, entitled Global market turmoil – what does it mean for Canada? says the firm’s managers see higher odds of a recession taking place in the second half of 2023, which should in turn dampen inflationary pressures as demand weakens.
European and U.S. lenders are being more stringent and writing fewer loans, which could have an impact on domestic growth in Canada if financial institutions were to do the same. “Even if they didn’t follow suit, slower international growth, all else equal, will no doubt negatively affect Canada’s economic outlook,” they write. “We continue to expect the central bank to cut rates by year end.” They also expect the U.S. dollar to weaken. “We remain constructive on the CAD in the medium term.”
Regarding the volatility of Canadian banks as investments, the firm says it’s important to note that Canada and the U.S. have very different banking systems and regulatory regimes. “The Canadian system is concentrated on larger diversified banks, while the U.S. banking system is more decentralized, with a focus on regional banks for everyday banking needs,” they write, adding that the dynamics which led to the closures in U.S. are less likely to affect Canadian banks.
The events, however, will still have an impact, they conclude: “In our view, the events that transpired in the United States – and the resulting market volatility – have strengthened our conviction about the increased likelihood of a recession in both Canada and the United States.”
