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Daniel Paolucci and Stefanie Papini shop in Richmond Hill, Ont. Consumer spending is on track for its strongest pace in three years. (Matthew Sherwood for The Globe and mail)
Daniel Paolucci and Stefanie Papini shop in Richmond Hill, Ont. Consumer spending is on track for its strongest pace in three years. (Matthew Sherwood for The Globe and mail)

Consumers expected to keep driving Canada’s economy Add to ...

A funny thing happened to the Canadian economy in 2013.

Consumers, who make up the largest share of the economy, didn’t go into hibernation as so many analysts had boldly predicted earlier in the year.

The theory was sound. Canadians are carrying record debts levels. Household debt to income ratios reached 163.7 per cent in the third quarter. With income and job gains modest, it wasn’t unreasonable to assume a shift to frugality.

But consumers kept right on buying, led by record purchases of cars and trucks. Real, or after-inflation, consumer spending is on track to end the year at a 2.3-per-cent annual pace – the strongest momentum in three years – according to Toronto-Dominion Bank. And increasingly, consumers make those purchases with less borrowing than in the past. Household credit growth remains at the lowest level in a generation.

The trend is expected to stretch into next year, giving the economy an unexpectedly strong foundation to build on.

“Consumer spending will remain the driving force behind the economy in 2014,” said TD economist Francis Fong. “Canadians are being much smarter about their spending habits and depending less on debt and more on net income.”

Bank of Montreal economist Benjamin Reitzes similarly predicted another “decent year” for consumer spending in 2014.

A couple of other factors are also sustaining spending: low inflation and intense retail competition, which is driving down prices of many items.

“Consumer spending has remained a stalwart supporter of growth in Canada,” the Canadian Chamber of Commerce noted in its 2014-2015 economic outlook, released last week. “Consumers are clearly willing to spend on big ticket items. Auto dealers are having their best year ever.”

Evidence of how well consumers were holding up before the critical holiday spree should show up in the October gross domestic product figures, due out Monday. The consensus among economists is for monthly growth to reach 0.2 per cent, down from the 0.3-per-cent gain in September.

In addition to consumer spending, output in other key sectors are holding up relatively well, including manufacturing and the oil patch. That’s expected to be offset by weakness in housing and exports.

Most economists now expect the economy to grow at a 2.7-per-cent annual rate in the final three months of the year, or roughly on par with the third quarter. That’s substantially better than the Bank of Canada’s recently downgraded projection of just 2.1 per cent.

“The economy is showing surprising spunk as we wind down the year,” BMO’s Mr. Reitzes said.

For the year as a whole, forecasters expect the economy to grow by a modest 1.7 per cent. Next year, growth should accelerate to 2.3 per cent.

It’s a good thing consumer spending is holding up because other parts of the economy are doing less well, most notably exports. Economists at the Bank of Canada and elsewhere have watched with concern the sputtering export sector, which has underperformed all year.

The hope was that exports would pick up as the U.S. economy recovered. The United States buys more than 70 per cent of Canadian exports.

Canada faces two problems. Much of the rebound in U.S. factory activity is occurring in the more southern states, where the trade linkages to Canada are weak. And secondly, it has lost substantial factory capacity since the Great Recession, highlighted by several recent major plant-closing announcements in Ontario, including H.J. Heinz Co. in Leamington (740 jobs), Novartis AG’s Ciba Vision plant in Mississauga (300 jobs), Kellogg Co. in London (550 jobs) and Faurecia Sa in Bradford (550 jobs). Most of the plants were major exporters.

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