The Canadian Press - Sept. 23, 2010

TORONTO — Canada's once reliable consumer is emerging as a weak link in the country's economic recovery and future growth prospects.

A survey of consumer confidence for September came in as expected Thursday, suggesting Canadians are losing faith in the recovery and putting purchasing decisions off for another day.  Research marketing firm TNS Canada said its consumer confidence index dropped 2.3 percentage points, tracking a similar downward trend found in other polls and coming on the heels of four straight monthly declines in retail sales.

The survey suggested that several factors are holding Canadians back from a more positive outlook, including lower confidence in household income and employment prospects over the next six months.  Fewer respondents said they thought the current period was a good time to make major purchases.

"After last month's mini-rally it seemed that consumers might be the sump pumps that could return some buoyancy to that recovery," said Michael Antecol, vice-president of the marketing research firm TNS Canada.  "Now, it seems as if those pumps are sputtering, leaving some rocky days ahead."

The likely explanation is that Canadian households -- much like their U.S. counterparts -- have simply run out of enough resources to continue powering the economy, analysts believe.  And Canadians are getting nervous about their job security, the biggest factor in the confidence index.

While the economy has recouped all the job losses from the recession, the unemployment rate remains about two points higher than pre-slump levels, and employment gains have slowed appreciably since the spring.

The Bank of Canada has been sending up red flags about the exposure of households to debt for the better part of the year, one reason it is the only central bank among the G7 countries to have begun raising interest rates.  The central bank is widely expected to pause for the next few months now that the recovery appears to be slowing much faster than anticipated.

By way of contrast, Canada's approach to monetary policy has been the exact opposite of the U.S., where the Federal Reserve said this week it will likely need to loosen the purse strings further through more quantitative easing.

Even if borrowing costs do rise, the issue for most indebted Canadians would not be insolvency, but the fact they will be forced to scale back on future purchases because a bigger slice of disposable income would be going to debt servicing. 

Scotiabank economist Derek Holt noted that while Ottawa can rightly boast of its sound fiscal position, that does not extend to the private sector.  When private debt is combined with that held by government, Canada's total punches in at 239 per cent of gross domestic product, not far removed from such free-spenders as the United States, the United Kingdom and Spain, and above such troubled economies as Italy and Japan.

"One of the dominant reasons Canada outperformed its peer group from the G7 over the past decade had to do with domestic economy strength, and I think that story is coming to a close," Holt said.  "We've experienced a tremendous bull run in the consumer sector and housing markets, but there's a case for arguing Canadian households are debt weary."

The Bank of Canada has also built more parsimonious consumers and a softer housing market into its future growth scenarios.  Combined with a weak export sector that is hamstrung by flagging demand from its largest market, the United States, and a strong loonie, several forecasting houses have slashed growth projections for Canada to two per cent and under for the next 18 months.

The latest was the CIBC, which said Wednesday it now expects the economy to expand by only 1.9 per cent next year -- 0.6 of a point less than its forecast just two months back and a full point below the Bank of Canada's forecast.  Growth in the two per cent range represents trend growth in normal times, but is unusually low for an economy just a few quarters out of a deep recession.

Holt said future pillars of Canadian growth will likely be commodity exports, particularly oil, and business investment. But for the first time since the last recession, the economy may have to plug along without much help from the consumer.