Skip to Content
News Releases
Back
Canadian consumers dig into their piggy banks ‎to fuel spending and carry economy: CIBC

Waning confidence and rising rates likely to curb spending - 1% hike would add $18 billion in interest costs

TORONTO, Aug. 5, 2014 /CNW/ - Canadian consumers have continued to carry the economy in 2014, but rather than borrow to fuel spending, Canadians have increasingly been cracking open their piggy banks and dipping into their savings, finds a new report from CIBC World Markets.

"Though Q1 wasn't a barn burner, nominal household spending was still up by 4.2 per cent, year-on-year," says Avery Shenfeld, Chief Economist at CIBC. "Furthermore, its contribution to GDP growth continues to remain in line with its long-term average and Q2 looks poised to see an acceleration. It wasn't borrowing, but until recently, elevated confidence and its impact on savings, that provided the fuel."

The report, co-authored by Benjamin Tal and Nick Exarhos, notes that weak disposable income gains have been offset by strong increases in net worth driven by healthy equity markets and climbing home prices. As a result, Canadians stabilized their savings rates at around 5 per cent in the first quarter of the year, a drop from levels seen in early 2013.

"With the asset side of consumer balance sheets allowing Canadians to reduce how much they squirrel away, more money has been temporarily available for spending," says Mr. Shenfeld. "Falling rates on pre-existing debt—which lowered both the incentive to save and debt-servicing costs—provided consumers with additional sources of relief. In fact, interest payments as a share of disposable income fell over the past year by a full percentage point to a record low of 7.1 per cent in the first quarter. Had payments and the savings rate stayed constant since Q1 2013, household consumption would have been around a percentage-point lower."

Overall household credit is currently rising by just over 4 per cent on a year-over-year basis—the slowest pace of credit expansion since 1995 and the slowest pace for credit growth in any non-recessionary period over the past 40 years.

  • Non-mortgage loans that usually finance ongoing consumption are rising by only 2 per cent on a year-over-year basis and have been falling relative to income over the past two years;
  • Credit card balances outstanding and lines of credit have not risen at all in the past year;
  • Direct loans are up by 7.5 per cent on a year-over-year basis—mostly due to the near-18 per cent increase in car loans. Car loans are only a small slice of total consumer credit and often offered at lower rates than what consumers can get elsewhere and for other purchases, in some way representing a subsidy on the part of manufacturers and dealers.

With employment picking up in the U.S. Mr. Shenfeld expects Federal Reserve Board Chair, Janet Yellen, to start raising rates in March 2015. He is calling for the Fed to take the rate from near zero to 1.25 per cent over the subsequent four quarters.

However, he believes rate hikes will be tempered given GDP growth has not matched employment gains stateside. His analysis suggests a mid-cycle U.S. funds rate of only 2½ per cent. That won't be the peak (at some later stage, the Fed will be in a tightening stance), but it's still lower than the Fed's 3¾ per cent medium term call.

The U.S. jobs-GDP gap also has implications for the Bank of Canada. "An earlier than expected hike by the U.S. would allow the Bank to raise Canadian short rates here without fear of excessive Canadian dollar strength," says Mr. Shenfeld. "But Bank of Canada Governor Stephen Poloz has been clear that he won't see the economy on a sustainable expansion path, justifying monetary tightening, until real exports and related capital spending supplant households as a growth driver. It's U.S. growth, not employment, that drives Canadian export activity. Softer U.S. trend GDP gains lean against a quick acceleration in Canadian export volumes, which might need some juice from a still-weaker loonie.

"As a result, we see no reason to move up the timing of the first Bank of Canada rate hike, which could be a half year later than the Fed. Patient Poloz will outlast Gentle Janet in the contest to see who blinks first."

The report notes that while higher rates might slow or even cut into home prices, they will likely have a larger impact on household spending. The home ownership rate in Canada has reached nearly 70 per cent with housing-related spending standing at almost 30 per cent of the consumption basket. Even though household debt—including the mortgage variety—has been building more slowly recently, it still stands at over one-and-a-half times disposable income.

"Applying our forecasts for Canadian rates to the historical relationship they have held with interest costs suggests that Canadians will soon be faced with paying 100 basis-points more in interest on existing debt by the first quarter of 2016," adds Mr. Shenfeld. "Those higher rates would mean close to $18 billion dollars more in interests costs at today's debt levels - over 1.5 per cent of current household consumption."

As a result, he says consumers won't be able to continue driving the Canadian economy for much longer. U.S. GDP growth and the Canadian corporate sector will need to take the reins.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eiaug14.pdf

CIBC's wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

SOURCE CIBC World Markets

For further information:

Avery Shenfeld, Chief Economist, CIBC World Markets Inc. at (416) 594-7356, avery.shenfeld@cibc.ca or Kevin Dove, Head of External Communications at 416-980-8835, kevin.dove@cibc.ca.

Back