Consumer spending unsustainable: interest rates to generate $18 billion in new interest payments by Canadians in 2016.
Over seventy percent of the Canadian economy is related to consumer spending. So it is important consumers keep on spending. This is what keeps the system afloat.
But according to Avery Shenfeld, chief economist for CIBC World Markets, Canadians are dipping into savings now to keep spending, and, more worrying, will be unable to maintain this spending once interest rates begin to rise in another year and a half.
The dismal story is found in a recent special economic report issued by CIBC World Markets. According to data, Canadian consumers are struggling to keep the consumer economy afloat here in 2014. Rather than borrow to fuel spending, as many Canadians have done, the average person is now, increasingly, dipping into savings to continue spending.
Overall household credit is rising by just about 4 per cent year-over-year. This is 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. But car loans are only a small slice of total consumer credit, and so are not a big source of consumer spending.
So where is the consumer spending coming from?
In an interview with Wealth Professional CIBC World Markets chief economist Avery Shenfeld explains that strong increases in equity markets and home prices have generated wealth for Canadians, and that this is where the spending strength if coming from these days “There were some savings from lowered interest costs, so some spending was out of that. GDP growth was up slightly, even with sluggish job growth. That has helped. The spending is coming out of savings,” says Shenfeld. As the values of stocks and homes goes up, “more money has been temporarily available for spending.
Much of the spending has come from falling rates on pre-existing debt, which provided consumers with additional sources of relief. 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,” according to Shenfeld.
But while the economy is benefitting as a result, this is not a recipe for a stable economy. “Squeezing future spending by borrowing is not good, but squeezing future spending by spending savings is similarly unsustainable,” says Shenfeld. “We need job and wage growth for that that.” He suggests hob growth would be helped by a lower dollar, which could come in the years ahead.
Shenfeld expects, “the Fed could move on interest rates as soon as March." If that were the case, the Canadian central bank would likely lage those rat raises by six months. There would be a six month period in which rates would be lower in Canada than in the U.S., the dollar would fall, "We could have one more leg up of growth in 2015…when the Fed is the first to start raising rates," says Shenfeld.
But the relief would be only temporary. Once Canadian interest rates begin to rise consumers will be hit with new and higher interest payments, which will, eventually, crimp consumer spending. "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," says Shenfeld. "Those higher rates would mean close to $18 billion dollars more in interests costs at today's debt levels, or, over 1.5 per cent of current household consumption.”
That is, according to Shenfeld, consumers won't be able to continue driving the Canadian economy for much longer.
But according to Avery Shenfeld, chief economist for CIBC World Markets, Canadians are dipping into savings now to keep spending, and, more worrying, will be unable to maintain this spending once interest rates begin to rise in another year and a half.
The dismal story is found in a recent special economic report issued by CIBC World Markets. According to data, Canadian consumers are struggling to keep the consumer economy afloat here in 2014. Rather than borrow to fuel spending, as many Canadians have done, the average person is now, increasingly, dipping into savings to continue spending.
Overall household credit is rising by just about 4 per cent year-over-year. This is 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. But car loans are only a small slice of total consumer credit, and so are not a big source of consumer spending.
So where is the consumer spending coming from?
In an interview with Wealth Professional CIBC World Markets chief economist Avery Shenfeld explains that strong increases in equity markets and home prices have generated wealth for Canadians, and that this is where the spending strength if coming from these days “There were some savings from lowered interest costs, so some spending was out of that. GDP growth was up slightly, even with sluggish job growth. That has helped. The spending is coming out of savings,” says Shenfeld. As the values of stocks and homes goes up, “more money has been temporarily available for spending.
Much of the spending has come from falling rates on pre-existing debt, which provided consumers with additional sources of relief. 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,” according to Shenfeld.
But while the economy is benefitting as a result, this is not a recipe for a stable economy. “Squeezing future spending by borrowing is not good, but squeezing future spending by spending savings is similarly unsustainable,” says Shenfeld. “We need job and wage growth for that that.” He suggests hob growth would be helped by a lower dollar, which could come in the years ahead.
Shenfeld expects, “the Fed could move on interest rates as soon as March." If that were the case, the Canadian central bank would likely lage those rat raises by six months. There would be a six month period in which rates would be lower in Canada than in the U.S., the dollar would fall, "We could have one more leg up of growth in 2015…when the Fed is the first to start raising rates," says Shenfeld.
But the relief would be only temporary. Once Canadian interest rates begin to rise consumers will be hit with new and higher interest payments, which will, eventually, crimp consumer spending. "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," says Shenfeld. "Those higher rates would mean close to $18 billion dollars more in interests costs at today's debt levels, or, over 1.5 per cent of current household consumption.”
That is, according to Shenfeld, consumers won't be able to continue driving the Canadian economy for much longer.
