Canada’s $2.19 trillion household debt load will likely start swelling again, now that the central bank appears to be on hold for at least the rest of the year with the economy going strong.
Consumers hit the snooze button last year on home and vehicle purchases, but that spending is about to resume, according to Fred Demers, a director at BMO Global Asset Management in Toronto. He argues lower interest rates, an accelerating housing market, a solid labour market, record high stocks and overall decent investment returns will support consumption.
“We’re probably going to see a pick up in big ticket items again,” Demers said in a phone interview. “It’s not great because we’re relying on debt, but in terms of dynamics, it looks more positive over the next 12 to 18 months in an environment where rates are going down, and not up.”
Home sales skidded to their lowest since 2012 last year as higher interest rates and tighter lending rules cast a pall over the real estate market. Automobile sales also suffered in Canada, with 2018 marking the first annual drop since the last recession. The malaise has been reflected in the pace of household credit growth, which has slowed to a crawl: It rose just 3.4 per cent in May, the weakest annual pace since 1983.
But the Canadian housing market — east of Manitoba, at least — is already showing signs of shaking off that weakness. Data from the Canadian Real Estate Association show prices through June in the Greater Toronto Area are 3 per cent higher on a six-month average basis, while Ottawa and Montreal have seen even faster gains, up 7.6 per cent and and 6.4 per cent respectively. In addition, the 11.5 per cent increase in resale volumes in the GTA signals “very strong,” demand, Demers said.
“The soft landing is behind us,” he added. “When you think about the GTA and Canada in general, we’re looking more at a re-acceleration.”
The high household debt level “remains a big concern and a headwind to the Canadian dollar,” said Demers, and without a strong capital spending boom, the lingering debt burden will mean it’s tough to “outperform trend growth” once rates eventually move higher, constraining disposable income.
In the shorter term, however, Demers is more bullish on Canada, partly because the country’s equity market may be less exposed to trade-war uncertainty. He sees car sales stabilizing this summer, and the housing market in central Canada continuing to accelerate. Gross domestic product for May on Wednesday will give an indication of whether the country’s economic upswing remains on track.
“The pace of credit growth should pick up in the second half of this year,” as more “trend-like” household spending returns, Demers said. “This removes a lot of the downside risks regarding households we saw earlier this year.”
Consumer confidence highest in a year and a half
One more reason to believe big-ticket spending is set for a rebound is the recent surge in consumer confidence measures, which are closely tied to the state of the economy and moves in stock markets. The Bloomberg Nanos economic mood index reached 59.06 this month, the highest level in a year and a half. Periods of elevated consumer confidence tend to coincide with increases in home and vehicle sales.
The fear of missing out is also fuelling the nation’s debt habit.
40 per cent of respondents, mostly millennials, say they’re spending more than they earn
A survey by Manulife Bank of Canada found almost 40 per cent of respondents, mostly millennials, say they’re spending more than they earn, and 12 per cent attribute the imbalance to an excess of costly outings with friends or family.
A lot of that has to do with the pressure of social media, according to Rick Lunny, the bank’s chief executive officer, who says especially for younger people who haven’t had time to build savings, the rising cost of housing and child care leaves little to spend on entertainment.
“Everybody’s on social media,” Lunny said by phone. “Everybody seems to have a better life than you. So you have this fear of missing out and you only live once attitude, but that’s a very expensive lifestyle when you can’t afford it.”
Bloomberg.com
