Maxime Leboeuf is a Senior Analyst in the Financial Markets Department at the Bank of Canada. Maxime also worked in the Advanced Economies Division of the International Department between 2012 and 2015. Primary research interests center on finance, macroeconomic, forecasting and applied econometrics. Maxime holds a Master’s degree in Economics from Queen’s University.
This note investigates whether Canadian corporate spreads and the excess bond premium (EBP) lead Canadian economic activity. Indeed, we find that corporate spreads precede changes in real gross domestic product (GDP) in Canada over the subsequent year. The EBP accounts for most of this property. Further, an unanticipated increase in the Canadian EBP forecasts a deterioration of domestic macroeconomic conditions: a 10-basis-point increase results in a fall in both GDP and consumer price index (CPI) of 0.4 per cent and 0.1 per cent, respectively, over three years.
While greater global financial integration is beneficial, the authors discuss how foreign capital inflows can also facilitate the buildup of domestic vulnerabilities and potentially lead to destabilizing reversals. Canada’s current international investment position is typical of advanced economies and will likely continue to act as an economic stabilizer. However, the growth and composition of Canada’s international investment position warrant continued monitoring.
The spread between the yield of a corporate bond and the yield of a similar Government of Canada bond reflects compensation for possible default by the issuing firm and compensation for additional risks beyond default.
The recovery in private business investment globally remains extremely weak more than seven years after the financial crisis. This paper contributes to the ongoing policy debate on the factors behind this weakness by analyzing the role of growth prospects and uncertainty in explaining developments in non-residential private business investment in large advanced economies since the crisis.