Canadian Consumers – Willing but Not So Able

(CanadaNewsWire – CIBC World Markets)

While consumer confidence in Canada has bounced back in the last year, CIBC World Markets Inc.’s new Consumer Capability Index finds that weak consumer fundamentals and an interest rate hike will see Canadians start to apply the brakes on spending.

After reaching a 15-year low in late 2008, consumer confidence, as measured by the Conference Board’s Consumer Confidence Index, has improved by 60%, and is now back to its long-term average, although still nearly 20% below its 2007 peak. This increase in confidence saw more Canadians at the cash register last quarter, with personal purchases climbing nearly four per cent on an annualized basis.

The CIBC Consumer Capability Index is designed to measure the ability of Canadian consumers to spend as opposed to their willingness to do so. What it found was a consumer that positively responded to the Bank of Canada’s monetary policy of low interest rates and is comfortable borrowing again. But it also found a consumer with a growing debt burden that is very sensitive to any increases in those low rates.

“Despite Canadian consumers’ high spirits, their recent consumption pattern has not been supported by an equivalent increase in income,” says Benjamin Tal, senior economist at CIBC, in his latest Consumer Watch report. “While improved sentiment can provide a short-term lift to household spending, a sustainable boost in activity must eventually be backed up by improving consumer fundamentals such as income growth, falling unemployment and reduced debt burdens.

The complete CIBC World Markets report is available here.