Canada’s Tepid Income Growth Likely to Moderate Strong Private Consumption
Private consumption has been an important driver of Canadian final domestic demand, which has been part of the structural shift in the country’s economy from exports and manufacturing. Supported by ample credit, household spending was also instrumental in pulling Canada’s economy out of recession in 2008-09 and expanding at a 4.4% q/q annualized rate in Q1 2010. However, we expect a moderation in the pace of growth as a number of domestic and global macro factors will constrain Canadian consumers. Primarily, consumption will be tempered by tepid income growth, even as debt levels continue to increase.
The robust recovery in the labor market was mainly in terms of the number rather than the quality of created jobs; in particular, there was minimal growth in hourly compensation, barely exceeding the inflation trend. As growth in personal disposable income stagnates and borrowing costs increase, consumer spending will continue on its moderation path. As we argued in our most recent outlook, consumer expenditure is likely to hover around the mid-2% range in Q3 as Canadian consumption becomes more aligned with income growth and household debt levels.
Figure 5: Private Consumption Share of Output Climbing (Chained C$, Millions SAAR)
Source: Factset
Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: North America Focus: Weak U.S. Data Spark “Race to the Bottom;” Canada’s Consumers Still Cool
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