Economy better able to withstand oil shock, Bank of Canada says

The Bank of Canada says the still-uncertain fallout from the steep drop in oil prices has left the country's financial system more vulnerable to any significant economic shocks to employment and incomes.

In its latest financial system review, the central bank says the oil slump on its own is unlikely to set off considerable systemic stress and the probability of a severe recession remains low.

But it warns a weak spot made worse by cheaper crude has put the system more at risk to any event that would lead to widespread job losses and falling incomes.

System more 'resilient'

The bank says in its semi-annual review that the consequences would reduce the ability of Canadians to service their rising debt loads and could set off a widespread housing-price correction.

The central bank lists the country's climbing level of household debt and its persistently overvalued real estate market as key vulnerabilities in the financial system.

The risk of a widespread correction in house prices has "increased marginally" since the last report in December, the bank said, while stressing that the possibility of that remains remote. The bank cites housing as an "elevated" risk which means it would have a potentially severe impact, but low probability.

Bank of Montreal economist Benjamin Reitzes noted that the central bank broke down household vulnerability by region, which suggests that Alberta, B.C. and Ontario (in that order) have the most vulnerable households due to higher debt-to-income ratios and a larger share of highly-indebted households.

"There's more debt to income, relatively, than we've ever seen before," Stephen Poloz said, referring to a few pockets of the country.

The central bank, however, also says financial reforms underway in Canada and abroad have put the Canadian system on better footing to absorb economic shocks.