Click here to close now.


News Feed Item

Canadian consumers dig into their piggy banks ‎to fuel spending and carry economy: CIBC

Waning confidence and rising rates likely to curb spending - 1% hike would add $18 billion in interest costs

TORONTO, Aug. 5, 2014 /CNW/ - Canadian consumers have continued to carry the economy in 2014, but rather than borrow to fuel spending, Canadians have increasingly been cracking open their piggy banks and dipping into their savings, finds a new report from CIBC World Markets.

"Though Q1 wasn't a barn burner, nominal household spending was still up by 4.2 per cent, year-on-year," says Avery Shenfeld, Chief Economist at CIBC. "Furthermore, its contribution to GDP growth continues to remain in line with its long-term average and Q2 looks poised to see an acceleration. It wasn't borrowing, but until recently, elevated confidence and its impact on savings, that provided the fuel."

The report, co-authored by Benjamin Tal and Nick Exarhos, notes that weak disposable income gains have been offset by strong increases in net worth driven by healthy equity markets and climbing home prices. As a result, Canadians stabilized their savings rates at around 5 per cent in the first quarter of the year, a drop from levels seen in early 2013.

"With the asset side of consumer balance sheets allowing Canadians to reduce how much they squirrel away, more money has been temporarily available for spending," says Mr. Shenfeld. "Falling rates on pre-existing debt—which lowered both the incentive to save and debt-servicing costs—provided consumers with additional sources of relief. In fact, 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."

Overall household credit is currently rising by just over 4 per cent on a year-over-year basis—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. Car loans are only a small slice of total consumer credit and often offered at lower rates than what consumers can get elsewhere and for other purchases, in some way representing a subsidy on the part of manufacturers and dealers.

With employment picking up in the U.S. Mr. Shenfeld expects Federal Reserve Board Chair, Janet Yellen, to start raising rates in March 2015. He is calling for the Fed to take the rate from near zero to 1.25 per cent over the subsequent four quarters.

However, he believes rate hikes will be tempered given GDP growth has not matched employment gains stateside. His analysis suggests a mid-cycle U.S. funds rate of only 2½ per cent. That won't be the peak (at some later stage, the Fed will be in a tightening stance), but it's still lower than the Fed's 3¾ per cent medium term call.

The U.S. jobs-GDP gap also has implications for the Bank of Canada. "An earlier than expected hike by the U.S. would allow the Bank to raise Canadian short rates here without fear of excessive Canadian dollar strength," says Mr. Shenfeld. "But Bank of Canada Governor Stephen Poloz has been clear that he won't see the economy on a sustainable expansion path, justifying monetary tightening, until real exports and related capital spending supplant households as a growth driver. It's U.S. growth, not employment, that drives Canadian export activity. Softer U.S. trend GDP gains lean against a quick acceleration in Canadian export volumes, which might need some juice from a still-weaker loonie.

"As a result, we see no reason to move up the timing of the first Bank of Canada rate hike, which could be a half year later than the Fed. Patient Poloz will outlast Gentle Janet in the contest to see who blinks first."

The report notes that while higher rates might slow or even cut into home prices, they will likely have a larger impact on household spending. The home ownership rate in Canada has reached nearly 70 per cent with housing-related spending standing at almost 30 per cent of the consumption basket. Even though household debt—including the mortgage variety—has been building more slowly recently, it still stands at over one-and-a-half times disposable income.

"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," adds Mr. Shenfeld. "Those higher rates would mean close to $18 billion dollars more in interests costs at today's debt levels - over 1.5 per cent of current household consumption."

As a result, he says consumers won't be able to continue driving the Canadian economy for much longer. U.S. GDP growth and the Canadian corporate sector will need to take the reins.

The complete CIBC World Markets report is available at:

CIBC's wholesale banking business provides a range of integrated credit and capital markets products, investment banking, and merchant banking to clients in key financial markets in North America and around the world. We provide innovative capital solutions and advisory expertise across a wide range of industries as well as top-ranked research for our corporate, government and institutional clients.

SOURCE CIBC World Markets

More Stories By PR Newswire

Copyright © 2007 PR Newswire. All rights reserved. Republication or redistribution of PRNewswire content is expressly prohibited without the prior written consent of PRNewswire. PRNewswire shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Latest Stories
Cloud computing delivers on-demand resources that provide businesses with flexibility and cost-savings. The challenge in moving workloads to the cloud has been the cost and complexity of ensuring the initial and ongoing security and regulatory (PCI, HIPAA, FFIEC) compliance across private and public clouds. Manual security compliance is slow, prone to human error, and represents over 50% of the cost of managing cloud applications. Determining how to automate cloud security compliance is critical...
As organizations shift towards IT-as-a-service models, the need for managing & protecting data residing across physical, virtual, and now cloud environments grows with it. CommVault can ensure protection & E-Discovery of your data - whether in a private cloud, a Service Provider delivered public cloud, or a hybrid cloud environment – across the heterogeneous enterprise.
Today air travel is a minefield of delays, hassles and customer disappointment. Airlines struggle to revitalize the experience. GE and M2Mi will demonstrate practical examples of how IoT solutions are helping airlines bring back personalization, reduce trip time and improve reliability. In their session at @ThingsExpo, Shyam Varan Nath, Principal Architect with GE, and Dr. Sarah Cooper, M2Mi’s VP Business Development and Engineering, explored the IoT cloud-based platform technologies driving t...
In his General Session at DevOps Summit, Asaf Yigal, Co-Founder & VP of Product at, explored the value of Kibana 4 for log analysis and provided a hands-on tutorial on how to set up Kibana 4 and get the most out of Apache log files. He examined three use cases: IT operations, business intelligence, and security and compliance. Asaf Yigal is co-founder and VP of Product at log analytics software company In the past, he was co-founder of social-trading platform Currensee, which...
The Internet of Things (IoT) is growing rapidly by extending current technologies, products and networks. By 2020, Cisco estimates there will be 50 billion connected devices. Gartner has forecast revenues of over $300 billion, just to IoT suppliers. Now is the time to figure out how you’ll make money – not just create innovative products. With hundreds of new products and companies jumping into the IoT fray every month, there’s no shortage of innovation. Despite this, McKinsey/VisionMobile data...
Culture is the most important ingredient of DevOps. The challenge for most organizations is defining and communicating a vision of beneficial DevOps culture for their organizations, and then facilitating the changes needed to achieve that. Often this comes down to an ability to provide true leadership. As a CIO, are your direct reports IT managers or are they IT leaders? The hard truth is that many IT managers have risen through the ranks based on their technical skills, not their leadership ab...
Just over a week ago I received a long and loud sustained applause for a presentation I delivered at this year’s Cloud Expo in Santa Clara. I was extremely pleased with the turnout and had some very good conversations with many of the attendees. Over the next few days I had many more meaningful conversations and was not only happy with the results but also learned a few new things. Here is everything I learned in those three days distilled into three short points.
DevOps is about increasing efficiency, but nothing is more inefficient than building the same application twice. However, this is a routine occurrence with enterprise applications that need both a rich desktop web interface and strong mobile support. With recent technological advances from Isomorphic Software and others, rich desktop and tuned mobile experiences can now be created with a single codebase – without compromising functionality, performance or usability. In his session at DevOps Su...
As organizations realize the scope of the Internet of Things, gaining key insights from Big Data, through the use of advanced analytics, becomes crucial. However, IoT also creates the need for petabyte scale storage of data from millions of devices. A new type of Storage is required which seamlessly integrates robust data analytics with massive scale. These storage systems will act as “smart systems” provide in-place analytics that speed discovery and enable businesses to quickly derive meaningf...
In his keynote at @ThingsExpo, Chris Matthieu, Director of IoT Engineering at Citrix and co-founder and CTO of Octoblu, focused on building an IoT platform and company. He provided a behind-the-scenes look at Octoblu’s platform, business, and pivots along the way (including the Citrix acquisition of Octoblu).
In his General Session at 17th Cloud Expo, Bruce Swann, Senior Product Marketing Manager for Adobe Campaign, explored the key ingredients of cross-channel marketing in a digital world. Learn how the Adobe Marketing Cloud can help marketers embrace opportunities for personalized, relevant and real-time customer engagement across offline (direct mail, point of sale, call center) and digital (email, website, SMS, mobile apps, social networks, connected objects).
The buzz continues for cloud, data analytics and the Internet of Things (IoT) and their collective impact across all industries. But a new conversation is emerging - how do companies use industry disruption and technology enablers to lead in markets undergoing change, uncertainty and ambiguity? Organizations of all sizes need to evolve and transform, often under massive pressure, as industry lines blur and merge and traditional business models are assaulted and turned upside down. In this new da...
In recent years, at least 40% of companies using cloud applications have experienced data loss. One of the best prevention against cloud data loss is backing up your cloud data. In his General Session at 17th Cloud Expo, Sam McIntyre, Partner Enablement Specialist at eFolder, presented how organizations can use eFolder Cloudfinder to automate backups of cloud application data. He also demonstrated how easy it is to search and restore cloud application data using Cloudfinder.
The Internet of Everything is re-shaping technology trends–moving away from “request/response” architecture to an “always-on” Streaming Web where data is in constant motion and secure, reliable communication is an absolute necessity. As more and more THINGS go online, the challenges that developers will need to address will only increase exponentially. In his session at @ThingsExpo, Todd Greene, Founder & CEO of PubNub, exploreed the current state of IoT connectivity and review key trends and t...
Two weeks ago (November 3-5), I attended the Cloud Expo Silicon Valley as a speaker, where I presented on the security and privacy due diligence requirements for cloud solutions. Cloud security is a topical issue for every CIO, CISO, and technology buyer. Decision-makers are always looking for insights on how to mitigate the security risks of implementing and using cloud solutions. Based on the presentation topics covered at the conference, as well as the general discussions heard between sessi...