There’s a popular caveat employed by analysts when writing about recent economic trends: “Barring another global economic shock …” Indeed, we’ve used it ourselves on occasion, particularly when writing about energy prices.

When your job is to predict the future based on the recent past, it’s nice to have a glib disclaimer that covers one of the main sources of financial uncertainty: the health of the global economy.

But if you see that disclaimer too often, the mind has a funny way of discounting its import.

In recent years, global economic shocks have occurred with, well, shocking regularity. And yet, the disclaimer performs the neat mental trick of pushing out such an eventuality into the distant, fuzzy future.

That temporarily allows us to sweat the small stuff, even though we should probably also be sweating the big stuff.

In the case of Canada, the country’s central bank recently summarized the big stuff quite succinctly in its biannual Financial System Review.

Rising consumer debt and an overheated housing market were cited as two major vulnerabilities, with potential challenges coming from a protracted energy-sector downturn and cracks in China’s economy.

The International Monetary Fund and the Organization for Economic Cooperation and Development have also issued recent warnings about these risks.

Location (x3)

Of course, all these factors are more or less intertwined. Consumer debt is rising largely as a consequence of the housing bubble, which is causing borrowers to take on record amounts of mortgage debt.

And as we noted last month, the country’s housing bubble appears to be increasingly fueled by foreign investors, at least in Vancouver and Toronto, which are among Canada’s biggest real estate markets.

That, itself, is at least partly due to affluent Chinese and other Asians protecting their wealth from the vagaries of their domestic policymakers by diversifying into hard assets denominated in more stable currencies.

In Toronto and Vancouver, home prices have jumped 13% and 25% year over year, respectively, and the price of the average detached single-family home in these metro areas is well north of seven figures. Yes, seven—not six.

Interestingly, while plenty of analysts and pundits can cite anecdotal evidence that foreign buyers are significantly adding to upward pricing pressure, the Canadian government has precious little data on the demographics of homebuyers.

Instead, economists have had to make extrapolations from unconventional data sets, and it’s a stretch to even characterize their findings as based on back-of-the envelope calculations.

Nevertheless, using decidedly unscientific methods, National Bank of Canada economists determined that as many as one-third of all home purchases in Vancouver last year and about 14% in Toronto were buyers in China.

Canadian Finance Minister Bill Morneau has vowed to do a “deep dive” into the country’s housing market to figure out how to engineer a soft landing.

Still, it would be more reassuring if the country’s statistical agency had actually gathered and compiled data on homebuyers so policymaking could be tailored to the actual situation, as opposed to a theoretical one.

Regardless, just about every economist, both in Canada and overseas, believes the current situation is unsustainable.

At the same time, we first heard predictions of an imminent housing crash in Canada in 2010. Back then, the situation in Vancouver and Toronto was already ridiculous. Now it’s beyond ridiculous. But clearly some economic shocks can get deferred indefinitely.

In this case, we wonder whether the energy crash will eventually cause a regional real-estate downturn to spiral into a national one.

While most analysts note Canada’s energy sector contributes just 10% to gross domestic product (GDP), money flows through an economy in ways that the national accounts can never fully quantify. For instance, the energy sector accounted for roughly one-third of business investment prior to crude oil’s collapse.

Friendly Neighbors

But for now, most Canadian economists are focused on the U.S., at least when they’re not worrying about China.

As CIBC economist Avery Shenfeld put it, “With energy sector capital spending diving and domestic consumers stretched, we are counting more than ever on exports to lever up growth, and the vast majority of such shipments are U.S. bound.”

To that end, the strength of the U.S. consumer is a key concern. Unfortunately, the May U.S. non-farm payrolls report has spooked global markets, as evidenced by the drop in the benchmark U.S. Treasury yield to 1.61%, its lowest level in nearly four years. Now that’s what we call a fear trade.

But monthly employment data can be notoriously volatile and often see significant revisions.

Although May non-farm payrolls came in at just 38,000, well below the 160,000 that economists had forecast, the three-month average and six-month average at 116,000 and 170,000, respectively, likely offer a more accurate picture of the U.S. labor market.

Still, it’s possible that Canada’s recent trade figures reflect a weakening U.S. employment market. After all, both statistics have seen a downward three-month trend.

Exports to the U.S. hit an all-time high of C$35 billion in January, but have declined sharply since then. In April (the most recent month for which we have data), the total value of exports to the U.S. came in at C$31.3 billion, down about 11% from the aforementioned high but still 4.6% above the trailing five-year average.

In the very near term, Canadian economists are focused inward. Canada’s second-quarter GDP will probably be pretty ugly due to the wildfires in Alberta sidelining substantial crude oil production.

While Statistics Canada reported that first-quarter GDP grew a relatively robust 2.4% annualized, the consensus forecast is for the economy to contract by 0.6% in the second quarter.

The good news about disasters is that they typically spur economic activity in subsequent quarters thanks to rebuilding and a return to full production.

As such, the second half of the year should see Canada’s economy enjoy a strong reacceleration.

And even if recent U.S. employment data turn out to be more than just a statistical blip, both Canada and the U.S. can count on extremely accommodative central banks to continue to do the heavy lifting for their respective economies.