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money management

Justin Sullivan

Heavier debt loads and a slowdown in income growth will cause the pace of Canadian consumer spending to soften over the next year, a bank report said Thursday.

The recent rise in consumer spending, which helped fuel fourth-quarter economic growth, has come at the same time households' actual ability to spend is weakening. That suggests the pickup in spending will be short-lived, Canadian Imperial Bank of Commerce economist Benjamin Tal said.

He believes consumer spending will "disappoint" over the next year.

"While improved sentiment can provide a short-term lift to household spending, a sustainable boost in activity must eventually be backed up by improving consumer fundamentals such as income growth, falling unemployment and reduced debt burdens," he said.

Consumer sentiment surveys tend to be subjective, so he has developed a new measure called the consumer capability index which uses seven factors to track household fundamentals. These factors measures include debt-to-income ratios, real income growth, the long-term jobless rate and personal bankruptcies, and compare current levels to long-term averages.


It shows growth in real disposable income has been declining over the past year, and "to a certain extent, debt is replacing income as a major driver of consumer purchases."

As of February, household credit was up by more than 7 per cent from a year earlier - more than three times faster than income growth.

The debt-to-income ratio, as a result, hit a record 147 per cent in December, and is accelerating at the fastest rate since the mid 1990s, Mr. Tal said.

Household debt is also climbing faster than assets, he added.

Some measures are improving - the savings rate is climbing and personal bankruptcies, though historically high, are slowing.

But by his combined measure, Canadian consumer fundamentals are at their weakest level in almost 15 years.

"The practical implication of the reduced consumer capability as measured by our index is that consumer spending will disappoint in the coming twelve months," he noted in the report entitled "Canadian consumers - more confident but less capable."

As interest rates are poised to rise this summer, and that will have a heavy impact on shoppers, he added.

"Given the vulnerable starting point of the consumer, the Bank of Canada will soon find that even a moderate monetary squeeze will be sufficient to drive a material deceleration in consumer spending."