Household spending continues to drive growth

By Staff | April 10, 2017 | Last updated on April 10, 2017
3 min read

As much as the Bank of Canada would like to see a rotation away from household spending and toward manufacturing and exports, the former continues to be the cornerstone of Canada’s economic growth.

Read: Potential growing pains for Canada’s economy

“Even with the pullback in exports in February that returned the country’s trade balance to a slight trade deficit (following three months in surplus), Canada’s economy is tracking growth of 3.4% (annualized) in the first quarter,” notes James Marple, senior economist at TD Bank, in an economics report.

Read: Canada’s trade surplus disappears while U.S. deficit shrinks

Benoit P. Durocher, senior economist at Desjardins, says in an economics report that, in January 2017 alone, the value of retail sales surged 2.2% — one of the sharpest monthly increases since retail sales started to be tracked in 1991.

He reviewed data to ascertain whether that consumption indicates a temporary jump or the start of a robust trend.

Pro side

On the positive side are recent gains in full-time jobs and a sharp fall in unemployment.

Since August 2016, almost 275,000 new jobs have been created, representing an average monthly increase of more than 34,000 jobs — a level not seen since spring 2007, he says. And the unemployment rate fell to 6.7% in March 2017 from 7.2% in January 2016.

Read: Help unemployed clients through difficult times

Accordingly, disposable income has accelerated since mid-2016, which helped increase consumption. And a reduced tax burden, courtesy of the 2016 federal budget, also contributes.

“Households clearly used some of this additional income [from a reduced tax burden] to grow their net savings, which pushed the savings rate to 5.8% in the fourth quarter of 2016, compared to a rate of only 4.7% in the first quarter of that year,” says Durocher. The data show that some of that income was also used to increase consumer spending.

Read: Clients’ top question: Have I saved enough?

Canadians’ confidence has also increased in the last few months, with the household confidence index rising to 111.7 in March, a level that exceeds the historical average. That bodes well for spending, especially for durable goods, says Durocher.

Con side

Households’ reduced tax burden will gradually fade over the next few months, says Durocher, which could affect spending by year-end. Further, debt levels are relatively high, but, with low rates, households aren’t yet feeling the pinch.

That could change with rising rates.

“Based on our estimates,” says Durocher, “the average interest on household debt would only have to go up about 65 basis points to put the debt service ratio above its historical peak,” cutting into future consumption.

Read: Mutual funds, not homes, increase Canadians’ net worth

Also, wage growth is weak, with average hourly wages flat since spring 2016. “If this weak wage growth continues, it could partially erode the benefits of surging job creation on consumption spending growth,” he says.

Weak wage growth is consistent with the lagging influences of the commodity shock on incomes, says Derek Holt, vice-president and head of capital markets economics at Scotiabank, in an economics update on wage growth.

“Canada is probably not even two-thirds of the way through the full aftermath of the commodity shock on incomes,” he says, and also notes weak wages are a reason for the Bank of Canada to retain its dovish outlook.

But, based on the overall data, Durocher expects household consumption spending to be positive in the next few quarters, especially as residential investment continues to rise. But additional restrictive measures to the housing market, especially in the Greater Toronto Area, could rein in residential investment’s contribution to economic growth in the second half of 2017, which would by extension decrease households’ contribution to GDP.

Read the full Desjardins report here.

Read the TD Bank report here, and the Scotiabank update here.

Advisor.ca staff

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.