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3rd Quarter 2022: Loan Book Watchlist

NEWSLETTER| Fri Oct 07 2022

The confluence of macroeconomic and geopolitical factors, such as, inflation, supply chain disruption, higher interest rates, an overheated housing market and Russia’s invasion of Ukraine contribute to the stagflation pressures in Ontario and other Canadian jurisdictions. Because of these factors, economists are attributing a higher probability to a global recession in 2022, up from 10% (COVID-induced) to 35%. This could translate into a projected drop in Ontario’s GDP, disrupting post-pandemic recovery. Using BBA’s risk taxonomy, we updated the risk dashboard:

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Sanctions on Russia will feed inflation, thus partly defeating monetary policymakers’ efforts. Central banks will continue juggling the incompatible objectives of taming inflation while also keeping long-term rates low through balance-sheet maintenance policies. All the while, governments must continue to fuel inflationary pressures with fiscal stimulus (e.g., transfer payments to households). This will lead to inconsistent results, leading to higher longer-term interest rates and sovereign spreads, which are already drifting sharply upwards.

Over time, tighter monetary policy may cause a growth slowdown or outright recession. Another risk for consideration is monetary policy constraints due to the threat of a debt trap. With private and public debt levels at historically high levels as a share of GDP, central bankers can only take policy normalization so far before risking a financial crash in debt and equity markets.

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Economic conditions affect the performance of firms and also impact the credit portfolios of lending organizations. Quarterly Review: Loan Book Watchlist (the “Watchlist”) highlights the trends due to changes in macroeconomic factors. The Watchlist presents forward-looking statements about the future economic conditions and its near term impact. The statements made are illustrative and subject to risk and uncertainty. Readers should consider limitations of this analysis and should not place undue reliance without engaging BBA’s software solutions.