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
You know you need the cloud, but you’re hesitant to simply dump everything at Amazon since you know that not all workloads are suitable for cloud. You know that you want the kind of ease of use and scalability that you get with public cloud, but your applications are architected in a way that makes the public cloud a non-starter. You’re looking at private cloud solutions based on hyperconverged infrastructure, but you’re concerned with the limits inherent in those technologies.
Is advanced scheduling in Kubernetes achievable?Yes, however, how do you properly accommodate every real-life scenario that a Kubernetes user might encounter? How do you leverage advanced scheduling techniques to shape and describe each scenario in easy-to-use rules and configurations? In his session at @DevOpsSummit at 21st Cloud Expo, Oleg Chunikhin, CTO at Kublr, answered these questions and demonstrated techniques for implementing advanced scheduling. For example, using spot instances and co...
As Marc Andreessen says software is eating the world. Everything is rapidly moving toward being software-defined – from our phones and cars through our washing machines to the datacenter. However, there are larger challenges when implementing software defined on a larger scale - when building software defined infrastructure. In his session at 16th Cloud Expo, Boyan Ivanov, CEO of StorPool, provided some practical insights on what, how and why when implementing "software-defined" in the datacent...
A strange thing is happening along the way to the Internet of Things, namely far too many devices to work with and manage. It has become clear that we'll need much higher efficiency user experiences that can allow us to more easily and scalably work with the thousands of devices that will soon be in each of our lives. Enter the conversational interface revolution, combining bots we can literally talk with, gesture to, and even direct with our thoughts, with embedded artificial intelligence, whic...
The use of containers by developers -- and now increasingly IT operators -- has grown from infatuation to deep and abiding love. But as with any long-term affair, the honeymoon soon leads to needing to live well together ... and maybe even getting some relationship help along the way. And so it goes with container orchestration and automation solutions, which are rapidly emerging as the means to maintain the bliss between rapid container adoption and broad container use among multiple cloud host...
The cloud era has reached the stage where it is no longer a question of whether a company should migrate, but when. Enterprises have embraced the outsourcing of where their various applications are stored and who manages them, saving significant investment along the way. Plus, the cloud has become a defining competitive edge. Companies that fail to successfully adapt risk failure. The media, of course, continues to extol the virtues of the cloud, including how easy it is to get there. Migrating...
Blockchain is a shared, secure record of exchange that establishes trust, accountability and transparency across business networks. Supported by the Linux Foundation's open source, open-standards based Hyperledger Project, Blockchain has the potential to improve regulatory compliance, reduce cost as well as advance trade. Are you curious about how Blockchain is built for business? In her session at 21st Cloud Expo, René Bostic, Technical VP of the IBM Cloud Unit in North America, discussed the b...
Imagine if you will, a retail floor so densely packed with sensors that they can pick up the movements of insects scurrying across a store aisle. Or a component of a piece of factory equipment so well-instrumented that its digital twin provides resolution down to the micrometer.
The need for greater agility and scalability necessitated the digital transformation in the form of following equation: monolithic to microservices to serverless architecture (FaaS). To keep up with the cut-throat competition, the organisations need to update their technology stack to make software development their differentiating factor. Thus microservices architecture emerged as a potential method to provide development teams with greater flexibility and other advantages, such as the abili...
In his keynote at 18th Cloud Expo, Andrew Keys, Co-Founder of ConsenSys Enterprise, provided an overview of the evolution of the Internet and the Database and the future of their combination – the Blockchain. Andrew Keys is Co-Founder of ConsenSys Enterprise. He comes to ConsenSys Enterprise with capital markets, technology and entrepreneurial experience. Previously, he worked for UBS investment bank in equities analysis. Later, he was responsible for the creation and distribution of life settle...
Blockchain. A day doesn’t seem to go by without seeing articles and discussions about the technology. According to PwC executive Seamus Cushley, approximately $1.4B has been invested in blockchain just last year. In Gartner’s recent hype cycle for emerging technologies, blockchain is approaching the peak. It is considered by Gartner as one of the ‘Key platform-enabling technologies to track.’ While there is a lot of ‘hype vs reality’ discussions going on, there is no arguing that blockchain is b...
Product connectivity goes hand and hand these days with increased use of personal data. New IoT devices are becoming more personalized than ever before. In his session at 22nd Cloud Expo | DXWorld Expo, Nicolas Fierro, CEO of MIMIR Blockchain Solutions, will discuss how in order to protect your data and privacy, IoT applications need to embrace Blockchain technology for a new level of product security never before seen - or needed.
ChatOps is an emerging topic that has led to the wide availability of integrations between group chat and various other tools/platforms. Currently, HipChat is an extremely powerful collaboration platform due to the various ChatOps integrations that are available. However, DevOps automation can involve orchestration and complex workflows. In his session at @DevOpsSummit at 20th Cloud Expo, Himanshu Chhetri, CTO at Addteq, will cover practical examples and use cases such as self-provisioning infra...
As DevOps methodologies expand their reach across the enterprise, organizations face the daunting challenge of adapting related cloud strategies to ensure optimal alignment, from managing complexity to ensuring proper governance. How can culture, automation, legacy apps and even budget be reexamined to enable this ongoing shift within the modern software factory? In her Day 2 Keynote at @DevOpsSummit at 21st Cloud Expo, Aruna Ravichandran, VP, DevOps Solutions Marketing, CA Technologies, was jo...
Leading companies, from the Global Fortune 500 to the smallest companies, are adopting hybrid cloud as the path to business advantage. Hybrid cloud depends on cloud services and on-premises infrastructure working in unison. Successful implementations require new levels of data mobility, enabled by an automated and seamless flow across on-premises and cloud resources. In his general session at 21st Cloud Expo, Greg Tevis, an IBM Storage Software Technical Strategist and Customer Solution Architec...