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Shoppers and visitors at the CF Toronto Eaton Centre on Sept. 7.Fred Lum/The Globe and Mail

Bank of Canada Governor Tiff Macklem keeps telling us that Canada hasn’t fallen into a true recession. Most economists tend to agree with him. Certain economics columnists at national newspapers (ahem) have said the same thing.

But apparently, Canadian consumers – whose opinion matters a lot in this question – strongly disagree. Their profound and deepening pessimism could change the policy discussion very quickly at the central bank.

The Conference Board of Canada published its monthly index of consumer confidence this week, and the results of this important consumer barometer were chilling. The index – which has been around for more than 60 years, through a couple of deep recessions and several near-misses, through periods of wildly soaring inflation and interest rates – recorded its third-lowest reading ever in November.

The only times that consumers have been more despondent than this were in April, 2020 (the lowest point during the COVID-19 pandemic), and June, 1982 (in the depths of a six-quarter recession, unemployment at 11 per cent, five-year mortgage rates of nearly 20 per cent). They were more optimistic during the global financial crisis of 2008-09, when the unemployment rate approached 9 per cent. They were more upbeat in 2015-16, when real gross domestic product failed to grow at all over a span of a year and a half.

Objectively, this isn’t even close to the worst state of affairs for economic prospects and household finances outside of a global health crisis. But to an awful lot of Canadians, it sure feels like it.

Let’s get technical about ‘technical recessions’

Pedro Antunes, the Conference Board’s chief economist, thinks the severe pessimism might stem from how rapidly Canada has gone from what looked like an unusually healthy economy to, now, a troubled one. The shift has been jarring and disorienting to public perceptions.

“Labour markets had never been as tight as we’ve seen in the last year or so. At the same time, savings were high,” Mr. Antunes said. “People were living in an environment where interest rates were, essentially, zero.”

That has quickly shifted to households coming to grips with the possibility that interest rates may never return to those low levels at which many people took out their mortgages. Not to mention a generally “sombre” tone to the current economic discussion, despite still relatively healthy employment levels.

“All of the news is around the Bank of Canada tightening, possibly a slowdown or even a recession, an expected slackening in the labour market,” he said. “All of these things are playing themselves out.”

Whether the negative mood is overblown or not, the consumer confidence index has long been a leading indicator of future behaviour. (Two of the four questions that make up the Conference Board’s survey are specifically forward-looking: It asks whether participants expect their personal finances and job availability will be better or worse six months from now. Both have been deteriorating for months, and eroded further in November.)

The implication is that we could be in for a worsening of what has already been a rapid retreat in consumer spending.

Statistics Canada’s figures show that retail sales, in volume terms, declined 0.6 per cent in the four months from June to September (the most recent month available). Since then, consumer spending trackers using credit-card transaction information showed that sales have continued to weaken. The Canadian Chamber of Commerce’s tracker showed that, in October, inflation-adjusted spending on a per-person basis was down nearly 4 per cent from a year earlier.

In the Bank of Canada’s most recent quarterly consumer survey – released in mid-October, covering a poll taken in mid-August – 58 per cent of Canadians said they are reducing spending in response to inflation and high interest rates. Half of the respondents said they expected the drag on their spending from high interest rates was either “halfway done” (22 per cent) or “just beginning” (28 per cent).

The data since that survey was taken suggest that the consumer outlook has worsened. The next survey – to be released in January – may well tell the central bank that the prospects for household spending in 2024 are fading faster, and further, than it had anticipated.

Perhaps that typical lag in the impact of interest-rate increases to work their way throughout the economy – something that the Bank of Canada has often talked about – is finally kicking in, now that the bulk of the rate hikes have been in place for more than a year. Maybe the bank’s two additional hikes, in June and July, finally broke consumers’ collective will.

Regardless, it appears that the Canadian consumer’s “animal spirits,” as famed British economist John Maynard Keynes called them, have been put into a near-unprecedented chill. And once extinguished, those spirits can be very difficult to rekindle.

That’s something that the Bank of Canada must take very seriously as it weighs the future of its interest rates entering 2024. Recession or not, the bank will have to ask itself how long it can keep its policy foot on consumers’ throats, before the prospects of a healthy recovery in spending are at serious risk.

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