Canadian consumers are tapped out, as new evidence suggests they will no longer be the driving force behind the country's economic rebound.
Proof of faltering momentum surfaced Monday in a Statistics Canada report showing consumer spending was flat in the first quarter of the year, the weakest showing in two years. In fact, with the exception of two tepid quarters during the recession, spending growth at the start of the year was the most anemic since 1998.
Consumers typically account for 60 per cent of the country's gross domestic product, and rising living costs along with elevated debt levels suggest they won't be much help this year. The flagging consumer comes as government spending is fading and Japan's woes weigh on this spring's auto production, more signs the economy's strong start to the year is petering out.
"Cleary the consumer is no longer rowing the boat," said Douglas Porter, deputy chief economist at BMO Nesbitt Burns.
The year started with a pop. Gross domestic product expanded at an annualized 3.9 per cent in the first quarter, the fastest pace in a year, led by business investment and manufacturing, Statistics Canada said.
But some economists think that pace will be cut by almost half in the second quarter, while Finance Minister Jim Flaherty told reporters Monday he's anticipating "more modest" growth in the rest of the year.
In the near term, households are under pressure as rising food and energy costs cut into their budgets. In the longer term, high debt levels could restrain spending for years, Toronto-Dominion Bank economist Diana Petramala warned, noting that the household debt service ratio - debt payments to disposable income - jumped to a three-year high of 7.8 per cent from 7.2 per cent.
Kim Thornton, for example, is one fatigued consumer. The mother of four says her family ran up about $50,000 in debt in prior years on credit card spending. She's since permanently altered her habits, and now clips coupons and uses the Internet to compare costs at different retailers. Instead of pricey amusement parks and movies, she's more apt to take her kids to the library or the beach.
In years past, she might have bought a new mattress under a "buy now, pay later" scheme. Not any more.
"I will never, never do that again. I want to have the money up front before I buy something, because I don't want to get into that trouble again," said Ms. Thornton, who is based in London, Ont.
Canadians are getting the message about whittling down debt, and that is translating into fewer purchases of discretionary goods, said Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada. Still, reduced hours and leaner wages - a legacy from the recession - mean many families have less money with which to service their debt, he added.
The flagging consumer is one of several reasons the Bank of Canada is expected to keep its key lending rate on hold Tuesday. A growing number of economists think the central bank will hold off until at least September amid concern over the European debt crisis, U.S. demand and a strong Canadian currency.
Several other factors point to ebbing momentum in the second quarter. Inventories ballooned in the first quarter as companies restocked, a surge unlikely to be repeated.
Bad weather plagued much of the country this spring. And massive supply chain disruptions from the Japanese earthquake wreaked havoc on North American auto production. Bank of Nova Scotia auto economist Carlos Gomes estimated that Canadian auto production fell 25 per cent in April amid lower production at Japanese-owned facilities in Ontario.
Business investment is the economy's bright spot, growing 3.2 per cent with more spending on machinery and equipment. Investments in plant and equipment have grown by a healthy 3.8 per cent, on average, in the past year.
Some companies are taking advantage of cheaper imports to invest in machinery, while others are expanding due to increased demand. BatHium Canada, for example, said in March that it's expanding at its Boucherville, Que., lithium battery site, an investment of $176-million. In Labrador, Iron Ore of Canada is investing $289-million to boost production.
With files from Jeremy Torobin in Ottawa and Greg Keenan in TorontoReport Typo/Error