Even though Canada technically entered a recession in the first half of the year, new GDP figures show Canadians are still spending more and saving less.
The country's gross domestic product contracted at an annual rate of 0.5 per cent in the second quarter, the weakest six-month growth period since the Great Recession of 2008. The drop was expected, given the current slump in oil prices, and the household-related data are at odds with the technical definition of a faltering economy, which is two consecutive quarters with negative growth.
With employment still growing, Canada had a 2.3-per-cent increase in consumer spending, financed by a drop in the savings rate. Bank of Montreal's chief economist, Douglas Porter, called this "modest" rise in spending a potential argument that Canada is not in a severe recession.
"Usually, a recession means you have broad-based pullback in spending, mostly consumer spending," he said. "Yet overall, consumer and household spending are still moving positively."
Household spending increased 0.6 per cent in the second quarter, after a 0.1 per cent gain in the first. Most of the growth was attributed to transport services, led by a 2.9 per cent increase in auto sales.
Investment in housing slowed in the second quarter, but a 4.1-per-cent decrease in new housing construction was offset by a 0.3-per-cent increase in home renovations, and activity among Realtors and real estate brokers rose 9.9 per cent, indicating continued strength in the real estate market.
But the increase in spending comes at the cost of Canadians' savings. The household savings rate and national savings rate both decreased, while the household debt-service ratio increased.
The household savings rate, a percentage or ratio between the net saving of the household sector and household disposable income, decreased to 4.0 per cent in the second quarter from 5.2 per cent in the first. But CIBC's chief economist, Avery Shenfeld, said this is typically a sign of household optimism. "It's nothing particularly alarming," said Mr. Shenfeld, who explained the savings rate is not dramatically low relative to the past few years.
Mr. Porter also believes the pullback is not of concern. "For the last six years, the [number] has bounced between 3.5 and 4.5 per cent, so 4 per cent is nothing to worry about," he said.
The household debt-service ratio, which is defined as household mortgage and non-mortgage payments divided by disposable income, was 14.07 per cent, up from 13.90 per cent in the first quarter. This is also relatively stable, Mr. Porter said, when compared to recent years. "The key is that the ratio is relatively well contained, despite record levels of household debt," he said.
But some economists suggest the longer trend is concerning. "The numbers may not be that different from a quarter ago or a year ago, but it was still bad at that time as well," said David Madani of Capital Economics, a former Bank of Canada employee. Mr. Madani said he is concerned by the run-up of household debt relative to income. The numbers do not show the whole picture, he said. For example, the household savings rate is based on consumption and current income without taking borrowing into consideration. So mortgages are left out of this statistic.
An unsustainable housing market, record household debt and the probability of a Federal Reserve rate hike in the United States, Mr. Madani said, are reasons to be concerned by the lack of saving, and that the debate around the recession is "losing its focus."
A BMO survey released on Tuesday found that 56 per cent of respondents had less than $10,000 in available emergency funds.
While the household spending numbers are a positive influence on the GDP, many believe they are not sustainable in the long run. Less growth in household spending and housing and more in exports and businesses are needed to sustain an economic recovery, Mr. Madani said.
Mr. Shenfeld said the low interest rates "won't drive consumption much" since Canadians have had access to them for a long time.
"You can't count on consumers to lead the way for the economy in quarters and years ahead," Mr. Porter said. "Exports would be needed to keep our head above water."
In the third quarter, Mr. Shenfeld said, we can expect to see a healthy growth rate in spending and a rise in the savings rate due to a larger than normal cheque during the summer from Ottawa for families and children.