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Insights and Strategies

Can the Consumer Continue to Drive Growth?

As we continue to debate if Canada, the U.S., and/or the rest of the world, is in, going in, or able to avoid recession, we would like to examine a key driver of economic growth: consumer spending. Household final consumption expenditure is a measure of spending on all goods and services by a country’s citizens. In Canada, it represents ~56 per cent of the measure of gross domestic product (GDP), so has significant weight in recession determination, but also in how many companies will see their revenues, profits, and ultimately share prices be affected. What we really want to know here, is how much capacity does the consumer still have to support economic growth, as we consider previous pandemic-era fiscal stimulus efforts, against a global economy being slowed by generally tighter monetary policies.

How did we get here?

In order to protect Canadians and the economy from the negative impacts of the COVID pandemic, the federal government sent out $211 billion in aid to businesses and individuals. In addition, during the pandemic, lockdowns and other precautionary measures restricted spending on goods and services of approximately $180 billion. The Bank of Canada (BoC) estimated that Canadians had used some of these funds to pay down debts or do home improvements, but by the end of 2020, over $100 billion was still sitting in personal bank accounts than would otherwise have been expected. As pandemic restrictions eased this pent-up spending capacity was unleashed on an economy that was struggling to keep up with demand as goods supply chains were disrupted and many services had trouble find employees as workers had retired or shifted to other areas.

As we progress through 2H23, we see a generally acknowledged global economic slowdown. Locally, we have interest rate increases implemented to slow the economy to tackle inflation, specifically by bringing demand in balance with supply. While these efforts have been somewhat successful so far, still strong wage growth, with a tight labour market, low unemployment, and ‘excess savings’ left over from government aid programs have surprised many recession watchers, pushing forecasts of a decline in GDP first from late 2022 into 2023, and now into late 2023 and perhaps 2024. How much will consumers continue to spend as headwinds mount?

GDP growth slowing [LHS]; and could be further pressured as BOC rate hikes are absorbed into the economy [RHS]

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