The Bank of Canada is about to introduce an important new addition to Canada’s suite of economic indicators – one that focuses on the Canadian consumer at what could be a key juncture for a huge and critical segment of the economy.
On Monday, the central bank will unveil the Canadian Survey of Consumer Expectations (CSCE), a quarterly poll of 2,000 Canadian households. It will release the poll at the same time as the quarterly Business Outlook Survey, its long-standing similar poll of business sentiment. The CSCE asks Canadians about their expectations on inflation, interest rates, jobs, wages, spending plans and local house prices.
The survey will shed important light on what is unquestionably an underserved segment of the economy, in terms of economic data. Beyond the Conference Board of Canada’s Index of Consumer Confidence, there is little formal tracking in this country of expectations in the consumer sector, which accounts for roughly 60 per cent of Canadian gross domestic product.
Statistics Canada tracks numerous consumer and household trends, but it doesn’t conduct polls on consumer confidence or expectations. The Bank of Canada has been polling businesses for the past 15 years to gauge their expectations on inflation, hiring and spending intentions, but it hasn’t provided similar intelligence on the Canadian consumer until now.
Most importantly, the survey gives the bank key insights into consumers’ inflation expectations. That’s vital information for a central bank that has relied on an inflation target to guide interest rates for nearly three decades now. As the bank said in a 2015 paper discussing its original creation of the survey, “Inflation expectations are … an important part of the information used by central banks to understand, forecast and control inflation, which is why it is important to have adequate measurements of these expectations.”
The Bank of Canada has actually been quietly conducting the survey since the fourth quarter of 2014, but has kept the results to itself until now. With five years of data under its belt, it appears the bank feels there is enough historical data now to tell a meaningful story for public consumption. Nevertheless, the survey hasn’t had a chance yet to span an entire business cycle. Indeed, it has only captured a slice of the expansion phase for the Canadian economy, albeit an important slice – roughly from the onset of the oil shock through the recovery, the start of interest-rate tightening, and the return of the economy to near full capacity.
The first publication of these survey results comes just nine days before the bank releases its quarterly update of its economic and inflation forecasts on Jan. 22. In the previous quarterly outlook in October, the central bank – with data from the survey in hand – forecast that household consumption and housing would improve modestly in 2020, after a sluggish 2019. It will be informative to see how consumer expectations have evolved since then, and how big a role they play in the updated outlook.
Looking at the bigger picture, what comes next will be new territory for the CSCE, as we approach a phase in the cycle for which there is no historical comparison in this new-ish survey. Unlike with the older Business Outlook Survey, the bank won’t have nearly as good a handle on the likely implications for the economy of shifts in the consumer sentiment trends. Nevertheless, the survey will be an important new addition to the Bank of Canada’s continuing conversation with the Canadian public, about the economy and interest-rate policy.
Indeed, the consumer sector of the economy could well play a pivotal role in Canada’s economic fortunes from here, in what has already been one of the longest expansions in history. Consumer spending and residential real estate have been critical growth engines for most of the past decade, aided by historically low interest rates. An unprecedented build-up of consumer debt has accompanied that expansion.
Whether consumers can maintain their enthusiasm as the cycle reaches maturity and, eventually, fades, will be a critical factor in where Canada’s economy goes from here. Given how overextended many Canadian households have become with mortgage and consumer debts, their response to any economic adversity could well have a much larger-than-usual impact on the downside of this business cycle.
As the Bank of Canada looks for cracks in consumer resilience and worries about how debt loads could colour consumer behaviour, the survey could become an increasingly important tool in the bank’s forecasting and monetary policy. For those trying to understand and anticipate interest-rate policy, this could quickly become essential reading.