Debt-saddled Canadian consumers are not prepared for the economic fallout if the U.S. goes into a recession, says a managing director at bond giant PIMCO.

Ed Devlin, who is also the head of Canadian portfolio management at PIMCO, told BNN Bloomberg on Thursday that it’s more likely than not that the U.S. economy will end its nine years of economic growth and experience a recession within the next three to five years.

“If we have a U.S. recession, I think Canada is not prepared for that kind of a shock and the Canadian consumer is not prepared for that kind of shock,” Devlin said.

“As [Canadian consumers are] repairing their balance sheets, the last thing they need is, say, a mini-bout of unemployment, because our biggest customer - who we are exporting to - slows down or goes into a recession.”

With U.S. economic growth expected to slow, Canada’s economy will likely drop from a “ballpark” two per cent to something closer to one per cent – and that could knock Canada into a small recession over the next few years, Devlin added.

“It’s kind of like when you’re driving without a spare tire - if we hit a bump - that’s kind of it,” Devlin said.

Earlier this week PIMCO released a report titled “Canada’s ‘Rudest Awakening’ May Come From Debt-Saddled Consumers” which warns that “over-indebted” consumers are no longer being supported by “ever-rising” home prices.

New lending rules and mortgage stress tests introduced by regulators earlier this year have helped cool once red-hot housing markets in Toronto and Vancouver.

OTHER RISKS FACING CONSUMERS

Devlin was quick to point out that he did not want to be grouped in the camp that says “housing is going to crash, Canada is going to crash,” adding: “That’s not where we are.”  

Besides a potential U.S. recession, Canada’s economy is also facing headwinds from an expected interest rate hike, looming mortgage renewals as well as increasing trade tensions with the U.S.

 “As [interest] rates have been falling for literally 20-30 years, that $1000 a month could buy you a bigger and bigger mortgage, because rates were lower and lower. Same thing will happen in reverse,” he said.

“It’s the reason we don’t think the Bank of Canada is going to hike as much as everybody else seems to think; because the Canadian economy just can’t handle it. Add the threat of a shock, whether that’s NAFTA or just a plain jane recession - because we’re nine years into an expansion in the U.S – [and] Canada is just not as well prepared as we’d like it to be.”

Despite that weakness the odds of a hike at the July 11 rate decision jumped to more than 72 per cent on Thursday, up from just over 50 per cent a day earlier. The Bank of Canada has raised rates three times since last July.

The most vulnerable consumers could start feeling the pinch from higher interest rates this year, Devlin said.

“The odds of this nice perfect handoff between the consumer – 92 per cent of the growth in Canada has been the consumer since the financial crisis – to investment in exports? We don’t think that baton gets handed over perfectly and I think one of the reasons [for that] would be NAFTA and trade,” he added.