Welcome!

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: http://research.cibcwm.com/economic_public/download/eiaug14.pdf

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
To leverage Continuous Delivery, enterprises must consider impacts that span functional silos, as well as applications that touch older, slower moving components. Managing the many dependencies can cause slowdowns. See how to achieve continuous delivery in the enterprise.
Actian Corporation has announced the latest version of the Actian Vector in Hadoop (VectorH) database, generally available at the end of July. VectorH is based on the same query engine that powers Actian Vector, which recently doubled the TPC-H benchmark record for non-clustered systems at the 3000GB scale factor (see tpc.org/3323). The ability to easily ingest information from different data sources and rapidly develop queries to make better business decisions is becoming increasingly importan...
Is the ongoing quest for agility in the data center forcing you to evaluate how to be a part of infrastructure automation efforts? As organizations evolve toward bimodal IT operations, they are embracing new service delivery models and leveraging virtualization to increase infrastructure agility. Therefore, the network must evolve in parallel to become equally agile. Read this essential piece of Gartner research for recommendations on achieving greater agility.
Today we can collect lots and lots of performance data. We build beautiful dashboards and even have fancy query languages to access and transform the data. Still performance data is a secret language only a couple of people understand. The more business becomes digital the more stakeholders are interested in this data including how it relates to business. Some of these people have never used a monitoring tool before. They have a question on their mind like “How is my application doing” but no id...
Kubernetes, Docker and containers are changing the world, and how companies are deploying their software and running their infrastructure. With the shift in how applications are built and deployed, new challenges must be solved. In his session at @DevOpsSummit at19th Cloud Expo, Sebastian Scheele, co-founder of Loodse, will discuss the implications of containerized applications/infrastructures and their impact on the enterprise. In a real world example based on Kubernetes, he will show how to ...
Pulzze Systems was happy to participate in such a premier event and thankful to be receiving the winning investment and global network support from G-Startup Worldwide. It is an exciting time for Pulzze to showcase the effectiveness of innovative technologies and enable them to make the world smarter and better. The reputable contest is held to identify promising startups around the globe that are assured to change the world through their innovative products and disruptive technologies. There w...
SYS-CON Events announced today Telecom Reseller has been named “Media Sponsor” of SYS-CON's 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. Telecom Reseller reports on Unified Communications, UCaaS, BPaaS for enterprise and SMBs. They report extensively on both customer premises based solutions such as IP-PBX as well as cloud based and hosted platforms.
SYS-CON Events announced today that Venafi, the Immune System for the Internet™ and the leading provider of Next Generation Trust Protection, will exhibit at @DevOpsSummit at 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. Venafi is the Immune System for the Internet™ that protects the foundation of all cybersecurity – cryptographic keys and digital certificates – so they can’t be misused by bad guys in attacks...
To paraphrase someone famous, "The definition of insanity is to do something the same way over and over again and expect a different result". Humans are creatures of habit and when it comes to storage, old habits die hard. Why do we continue to put our faith in legacy storage providers when they haven't invented anything new in decades. Sure, they re-badge their products every couple of years to make their messaging look modern, but ultimately, it's the same old stuff with a new coat of lipsti...
StarNet Communications Corp has announced the addition of three Secure Remote Desktop modules to its flagship X-Win32 PC X server. The new modules enable X-Win32 to safely tunnel the remote desktops from Linux and Unix servers to the user’s PC over encrypted SSH. Traditionally, users of PC X servers deploy the XDMCP protocol to display remote desktop environments such as the Gnome and KDE desktops on Linux servers and the CDE environment on Solaris Unix machines. XDMCP is used primarily on comp...
Smart Cities are here to stay, but for their promise to be delivered, the data they produce must not be put in new siloes. In his session at @ThingsExpo, Mathias Herberts, Co-founder and CTO of Cityzen Data, will deep dive into best practices that will ensure a successful smart city journey.
SYS-CON Events announced today that StarNet Communications will exhibit at the 19th International Cloud Expo, which will take place on November 1–3, 2016, at the Santa Clara Convention Center in Santa Clara, CA. StarNet Communications’ FastX is the industry first cloud-based remote X Windows emulator. Using standard Web browsers (FireFox, Chrome, Safari, etc.) users from around the world gain highly secure access to applications and data hosted on Linux-based servers in a central data center. ...
Using new techniques of information modeling, indexing, and processing, new cloud-based systems can support cloud-based workloads previously not possible for high-throughput insurance, banking, and case-based applications. In his session at 18th Cloud Expo, John Newton, CTO, Founder and Chairman of Alfresco, described how to scale cloud-based content management repositories to store, manage, and retrieve billions of documents and related information with fast and linear scalability. He addres...
Aspose.Total for .NET is the most complete package of all file format APIs for .NET as offered by Aspose. It empowers developers to create, edit, render, print and convert between a wide range of popular document formats within any .NET, C#, ASP.NET and VB.NET applications. Aspose compiles all .NET APIs on a daily basis to ensure that it contains the most up to date versions of each of Aspose .NET APIs. If a new .NET API or a new version of existing APIs is released during the subscription peri...
The 19th International Cloud Expo has announced that its Call for Papers is open. Cloud Expo, to be held November 1-3, 2016, at the Santa Clara Convention Center in Santa Clara, CA, brings together Cloud Computing, Big Data, Internet of Things, DevOps, Digital Transformation, Microservices and WebRTC to one location. With cloud computing driving a higher percentage of enterprise IT budgets every year, it becomes increasingly important to plant your flag in this fast-expanding business opportuni...