Canadian consumer spending growth has been muted of late despite strong fundamentals in the form of healthy labour markets and low borrowing costs, says a new report by TD Economics.
The report by senior economist Brian DePratto, Whither Spending? The Drivers of Lacklustre Canadian Spending, says three key domestic factors are to blame: policy-induced softness in housing markets in recent years, what appears to be sated demand for motor vehicles, and still-challenged household balance sheets.
These three factors are likely magnified in a global backdrop of heightened economic policy uncertainty, it said, adding that housing markets may have come back to life, but the impact of past developments, alongside the other factors augur for a subdued pace of consumer spending, and by extension, GDP growth over the medium-term.
“Let’s start with a hypothetical question. Consider an economy with 1.4 per cent annual population growth (fastest in the G-7), that is producing new jobs at a robust rate (25,000 jobs per month or 1.6 per cent year over year) that are largely full time in nature. Also imagine a job market where wage gains are trending north of three per cent (enough to send the most recent quarterly read of incomes to a nearly seven per cent annualized pace). Oh, and lastly, add on relatively low borrowing costs that have moved steadily lower since the year began, and a housing market that has seen six straight months of rising sales activity and prices,” writes DePratto in the report.
“What would you expect household spending in that economy to grow at? This is of course a trick question – all those statistics describe the trends over the last year and half in the Canadian economy. Yet despite these healthy fundamentals, spending growth has been tepid. Total real consumer spending gains have been trending at a sub-two per cent rate or just 0.5 per cent in per-capita terms. Beneath this already soft trend is a weak split – spending on goods has effectively flatlined from 2018 onwards, falling on a per-capita basis.
“Why has Canadian consumption lagged the strengthened fundamentals (and healing housing markets), and will it pick up? The answer comes down to a hang-over of sorts from recent years’ events – three in particular. The first is the impact of macro-prudential housing policies that slowed activity in this sector markedly in recent years. The second: the end of a long uptrend in per-capita auto sales that appears to have left demand satiated. And third, still-challenged household balance sheets. This report examines each of these factors in turn, finding that only one – household balance sheets – is likely to fade soon. This means that for the foreseeable future, both the soft overall trend is likely to continue, and are why our Quarterly Economic Forecast includes only modest consumer spending growth.”
DePratto concludes his report by saying many of the key fundamentals point to consumer strength. Net hiring is expected to continue and income gains are projected to hold in a moderate three to four per cent range. The interest-rate environment should also remain favourable.
“But the reality of late has been a tepid performance at best. As this report has shown, a handful of headwinds have conspired to hold back consumer spending. The unfortunate news is that while there are some encouraging near-term dynamics taking place, particularly in housing markets, the overall impact is unlikely to dissipate any time soon. As the saying goes, history may not repeat itself, but it often rhymes. If you sell to Canadian consumers, expect the next few years to feel awfully familiar,” he writes.