Gloom, heavy debt keeps economy on slow track

Canada’s once reliable consumer is emerging as a weak link in the country’s economic recovery and future growth prospects.

Canada’s once reliable consumer is emerging as a weak link in the country’s economic recovery and future growth prospects.

A recent survey of consumer confidence for September came in as expected Thursday, suggesting Canadians are losing faith in the recovery and putting purchasing decisions off for another day.

Research marketing firm TNS Canada said its consumer confidence index dropped 2.3 percentage points, tracking a similar downward trend found in other polls and coming on the heels of four straight monthly declines in retail sales.

The survey suggested that several factors are holding Canadians back from a more positive outlook, including lower confidence in household income and employment prospects over the next six months.

Fewer respondents said they thought the current period was a good time to make major purchases.

“After last month’s mini-rally it seemed that consumers might be the sump pumps that could return some buoyancy to that recovery,” said Michael Antecol, vice-president of the marketing research firm TNS Canada.

“Now, it seems as if those pumps are sputtering, leaving some rocky days ahead.”

The likely explanation is that Canadian households — much like their U.S. counterparts — have simply run out of enough resources to continue providing the ballast that sustains the economy, analysts believe.

The Bank of Canada has been sending up red flags about the exposure of households to debt for the better part of the year, one reason it is the only central bank among the G7 countries to have begun raising interest rates.

The issue is not that Canadians might go bankrupt — most analysts estimate only a small minority are threatened by insolvency in the near future — but that they will pull in their spending, which appears to be happening.

Scotiabank economist Derek Holt noted that while Ottawa can rightly boast of its sound fiscal position, that does not extend to the private sector.

When private debt is combined with that held by government, Canada punches in at 239 per cent of gross domestic product, not far removed from such free-spenders as the United States, the United Kingdom and Spain, and above such troubled economies as Italy and Japan.

“One of the dominant reasons Canada outperformed its peer group from the G7 over the past decade had to do with domestic economy strength, and I think that story is coming to a close,” Holt said.

“We’ve experienced a tremendous bull run in the consumer sector and housing markets, but there’s a case for arguing Canadian households are debt-weary.”

The Bank of Canada has also built more parsimonious consumers and a softer housing market into its future growth scenarios.

Combined with a weak export sector that is hamstrung by flagging demand from its largest market, the U.S., and a strong loonie, several forecasting houses have slashed growth projections for Canada to two per cent and under over the next 18 months.

That represents trend growth in normal times but is unusually low for an economy just a few quarters out of a deep recession.

Holt said future pillars of Canadian growth will likely be commodity exports, particularly oil, and business investment. But for the first time since the last recession, the economy may have to plug along without much help from the consumer.

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