Don sent in a link to this story in the Leader-post about the growth in Canadian household debt at a time when incomes are stagnant or dropping.
“Despite Canadian consumers’ high spirits, their recent consumption pattern has not been supported by an equivalent increase in income,” said Benjamin Tal, senior economist at CIBC World Markets. “In fact, growth in real disposable income has been trending downward over the past year and to a certain extent debt is replacing income as a major driver of consumer purchases.”
Household debt — mostly mortgage debt — is growing three times faster than income, he said.
The Conference Board of Canada reported consumer confidence reached a low at the end of 2008 and has since rebounded by 60 per cent, back to its long-term average, Tal notes.
“But 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,” he said.
The good news: Canadians are feeling confident about the economy and are willing to spend money. The bad news: When you look at the numbers they have less ability to spend, willing though they may be:
“Combining all of the above information into one index reveals that Canadian consumer fundamentals are weaker than they have been in almost 15 years,” Tal writes. Household debt is rising twice as fast as assets, personal income growth is “softening” and the gap between income and house prices is at a 20-year-high, which Tal says means real estate markets will stagnate or fall over the coming years as mortgage rates rise and increased housing starts bring prices down.
“Those minuses are moderated by the recent increase in the saving rate, and a low long-term unemployment rate, but overall the balance is still weighted to the downside,” he said.
That means that consumer spending will stall over the next 12 months, he said.