Canadian consumer spending to grow — along with household debt:Conference Board

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Canadian consumer spending to grow — along with household debt:Conference Board

BY KIM COVERT, FINANCIAL POST JANUARY 18, 2012

One big reason why Canadian consumer debt is at record levels is the wide-scale availability of credit cards, which were first introduced in the 1960s.

Photograph by: Reuters, Reuters

OTTAWA — Joe Public can be forgiven for wondering why he should care about Europe's sovereign debt crisis — after all, other than making equity markets see-saw wildly, it seems like a problem for other people far away.
A report released Wednesday by the Conference Board of Canada brings the story closer to home, however, by drawing a direct line between fears of an economic meltdown across the pond and soaring levels of Canadian household debt.
Nervousness about the possibility that sovereign debt contagion in Europe could slow the global economy acts as a rein on business spending, which in turn slows job creation and income growth and will eventually add to household debt levels, writes Pedro Antunes, director, national and provincial forecast, in the board's Winter Outlook.
Canada's employment situation flatlined in 2011 as concern over European debt and market volatility grew, and wages stagnated even as historically low interest rates encouraged households to take on more debt, he said.
Projected modest job growth of 1.6 per cent in 2012, "coupled with unimpressive wage gains, will lead to disappointing growth in household income in 2012 —up just 3.5 per cent," Antunes writes, calculating that after-tax income will grow by just 2.8 per cent this year, less than in 2011 and far below the pre-recession pace of five per cent.
Meanwhile, consumer spending will outpace income growth, the report says, as the housing market remains strong, interest rates remain low and as consumer confidence returns. While the situation is "not yet desperate," Antunes notes the money for all that spending growth will be plastic.
"A much stronger performance is forecast for 2013. Until then, however, households are expected to keep their spending up by falling deeper into debt —a trend motivated by rock-bottom interest rates," he said.
Debt will become a real problem when interest rates increase —a point that has been made numerous times by both Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty.
Delivering his Monetary Policy Report on Wednesday, Carney predicted that the current record level of household debt —Canadians owe $1.54 for every dollar they earn — will only increase, but noted that authorities are working to make sure that "more vulnerable households" are not getting in too deep.
Flaherty, speaking in Gatineau, Que., on Wednesday ahead of a pre-budget consultation via teleconference, said he's "encouraged" by recent moderation in housing prices, and by the fact that Canadians have been paying down their credit card debt.
"We've seen some softening in residential house prices of late. That's desirable," Flaherty said. "I don't anticipate intervening in the residential real estate market in terms of mortgage insurance now. We watch the market. We've intervened three times in the past six years. If it's necessary to intervene again, we will, but I don't see that at this time."
Household debt is a logical outcome a policy of low interest rates, says Douglas Porter, deputy chief economist at BMO Capital Markets.
"Without pounding on a favourite drum, note that the fact that households have become a net borrower of funds (after being a net supplier for decades), is simply a delayed response to persistently low interest rates," Porter wrote in a note Wednesday. "With real rates likely to remain deeply negative for some time yet, don't look for households to suddenly become big net savers anytime soon."
Postmedia News

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