OTTAWA — A major Canadian bank says consumers are spending more than they can afford.
The CIBC’s consumer capability index shows that while consumer confidence is rising in Canada, consumers’ ability to purchase is actually falling.
The disconnect suggests that consumer spending, which has driven the surprisingly strong rebound from recession in Canada, won’t be able to so for much longer.
The bank says real disposable income is trending downward, consumer debt is rising both in relation to income and assets, as is the gap between income and real estate values.
It all adds up to a credit squeeze ahead for Canadian households, particularly since unemployment remains elevated and wage growth has slowed.
CIBC notes that the main feature supporting Canadian households is low debt service charges because of record-low interest rates. But that is unlikely to last.
“The practical implication ... is that consumer spending will disappoint in the coming 12 months,” writes CIBC analyst Benjamin Tal.
Given the weak starting point, Tal says that any move by the Bank of Canada to start raising interest rates, even moderately, will have a profound dampening impact on consumer spending.
CIBC notes that the main feature supporting Canadian households is low debt service charges because of record-low interest rates. But that is unlikely to last.
With the economic recovery in full swing and inflation rising, most economists expect the central bank to start lifting interest rates this summer. Already this week, several big chartered banks have moved ahead of the Bank of Canada in raising fixed mortgage rates.