Canada's Housing Bubble

Mar 23, 2011 Michael Babad theglobeandmail.com

Attention shoppers

Are Canadian consumers, so crucial to the economy, tapped out?

Economists Derek Holt and Gorica Djeric of Scotia Capital believe they're "exhausted," having bucked the global trend through the recession and after.

"The consumer is tapped out," they said in a report today. "There is no pent-up demand in this country. Real consumer spending indexed to the start of 2007 for Canada compared to other major economies shows Canada as being unique in moving on to record highs through the crisis and following, while every other major economy was flat to down."

Their comments followed yesterday's report from Statistics Canada, which showed retail sales fell in January for the second month in a row, by 0.3 per cent, pulled down largely by a decline in new car sales. In volume terms, sales were down 0.6 per cent.

Statistics Canada noted that sales fell in the four biggest provinces, which represent 85 per cent of the total. The biggest drop, of 1 per cent, was in Quebec, where the sales tax climbed by a percentage point in the same month.

Mr. Holt and Ms. Djeric don't believe the tax hike sparked the full drop in Quebec, whose sales would have been weak regardless.

"Add to this the evidence that sales fell in so many categories on nation-wide terms, thus reflecting broad-based weakness."

What's that mean for the overall economy?

"[The] retail sales report threw the first bucket of water on what otherwise appeared to be a blistering hot start to the New Year," CIBC World Markets economist Emanuella Enenajor said yesterday.

"The 0.6-per-cent drop in real retail sales volumes exerts a modest drag on January’s GDP, especially with the weakest category, autos, having a lower value-added (markup) to GDP than other sectors. We still expect January’s growth to come in above the 0.5-per-cent pace registered in the prior month."

National Bank Financial economist Mattieu Arseneau still believes spending growth of 1.5 per cent to 2 per cent is "achievable" in the first quarter, projecting spending on services will climb, offsetting the weakness from the goods side.

Some observers have predicted for some time that retail spending would fall as consumers grapple with high debt, worried about what happens when interest rates rise later this year and in the face of warnings from policy makers, such as Bank of Canada Governor Mark Carney, that they had best get their fiscal houses in order.

"The last two months of slowing momentum in retail spending confirms our view that given high household debt and a low savings rate, the Canadian consumer can no longer be the main engine for economic growth it once was," said economist Diana Petramala of Toronto-Dominion Bank.

"Rather, Canadian economic growth is likely to be driven through a revival in exports and business investment."