Heading into 2009, there are signs that the Canadian economy is experiencing more stress due to the direct and indirect effects of the slowdown in the United States.
Since the beginning of the year, the effects of this deteriorating economic climate have clearly put a chill on consumer spending and on housing.
For example, year over year growth of retail sales has slowed from 5.9% in the first quarter to 3.7% in the second quarter. Also, sales of existing homes have slowed. In June they are down slightly more than 13% year to date.
Finally, despite a still quite strong pattern of employment and income growth for the country as a whole, personal bankruptcies in the first six months of the year are up by 3.8% over the same period in 2007.
Over the next couple of quarters, and quite possibly into 2009, the effect of weak U.S. economic growth is likely to continue to hobble growth in Canada in general and consumer spending and residential construction in particular.
However, a number of factors suggest that consumers and potential homebuyers will be able to weather this slowdown better than previous ones.
First, the percentage of mortgages in arrears is unchanged since the beginning of the year, indicating that homeowners with mortgages are showing little or no evidence of financial stress.
Second, household credit is continuing to expand at a healthy pace fuelled in part by lower effective borrowing costs resulting from the 150 basis point reduction in the Bank Rate since late in 2007.
Third, according to a recently published analysis of household credit by CIBC World Markets, the delinquency rate of credit cards has actually improved somewhat since the beginning of the year.
Also, given the Bank of Canada’s most recent comments regarding growth and inflation, interest rates are likely to remain little changed over the next several months.
Finally, the recent decline in energy prices should strengthen consumer confidence and provide consumers with a welcome increase in discretionary income.
Join the Discussion