CIBC World Markets has released a report questioning how much longer consumers can keep fueling economic growth in Canada.
In a report released on August 5, authors Benjamin Tal, Nick Exarhos, and Avery Shenfeld note that while Canadians have not seen much of an increase in their disposable incomes, thanks to healthy stock markets and climbing home prices they have seen gains in their net worth. These factors, combined with falling interest rates on pre-existing debt, have made consumers more inclined to spend than to save.
The report points out, however, that eventual interest rate hikes will pack a punch because of the high concentration of people carrying larger mortgages. By the first quarter of 2016, the authors predict that Canadians will have to pay 100 basis points more in interest on existing debt. Consumer spending is expected to slow as a result.
"How long can consumers hold the fort? Not long," concludes the report. "Confidence has started to slip, and the savings rate is vulnerable to a climb ahead. So far, the consumer has allowed the economy to buy time while the corporate sector sat on its hands. But although July auto sales were impressive, the clock is ticking on the arrival of the hoped for but yet to be realized rotation to business spending and exports."