Key Takeaways
- Canada’s economy is experiencing a more uniform increase in consumer spending across all income groups, unlike the US which is seeing a K-shaped pattern.
- This trend may not be sustainable, as lower-income households may be dipping into savings to support spending.
- The Canadian labour market has added a significant number of jobs, but the unemployment rate has risen as more people look for work.
- The Bank of Canada’s interest rate decision and new data on income and spending may change the narrative on the economy.
- Consumer spending plans remain weak due to high prices, economic uncertainty, and the cost of housing.
Introduction to the K-Shaped Pattern
The concept of a K-shaped pattern in consumer spending has been gaining attention in the US, where high-income earners are driving most of the growth in consumer spending, while middle- and lower-income earners are lagging behind. However, according to Andrew Grantham, senior economist at CIBC Capital Markets, Canada’s economy is not experiencing the same level of disparity in consumer spending. In fact, spending across all income groups in Canada has seen similar increases over the past few years. This may seem like good news, but it could actually point to larger issues, such as lower-income households dipping into savings to support spending.
The Canadian Economy’s Unique Characteristics
Grantham notes that the divergence between consumer spending patterns in Canada and the US may not be surprising, given that Canada’s high-income earners don’t have the same degree of wealth and income compared to their US counterparts. The trend could be a "timing issue," he said, as gains in the Canadian stock market have lagged the US by a number of years. Additionally, trade uncertainty could also help explain the more conservative approach to spending among high-income households in Canada. Furthermore, high-income households in Canada may be more interest rate sensitive than their American counterparts, with a greater proportion still holding mortgages that continue to reset at higher rates.
Labour Market Trends
The Canadian labour market has added a significant number of jobs, with Statistics Canada data showing that the economy added approximately 190,000 jobs from September to December of last year. However, the unemployment rate rose to 6.8% in December as more people looked for work, which could be a sign that improved labour market conditions are leading to more optimism among job seekers. Grantham notes that the improvement in the labour market is crucial to sustaining spending among lower- and middle-income households. If the labour market does not continue to improve, there is a risk that spending among these groups will slow down.
Interest Rate Decision and Economic Outlook
The Bank of Canada’s next interest rate decision is set for Wednesday, and it is widely expected that the central bank will leave rates unchanged at 2.25%. Grantham notes that new data on income and spending, scheduled to be released this week, may change the narrative on the economy. The Bank of Canada will also release its latest quarterly economic outlook on Wednesday, which will provide more insight into the bank’s expectations for the economy. Additionally, Statistics Canada is set to release figures for the third quarter on income, consumption, savings, and wealth across Canadian households, which will provide a more detailed picture of the economy.
Consumer Spending Plans
The Bank of Canada’s survey of consumer expectations for the fourth quarter of last year showed that consumer spending plans continue to be weak. High prices, economic uncertainty, and the cost of housing remain the biggest factors constraining household spending. This is consistent with Grantham’s observation that lower-income households may be dipping into savings to support spending, and that the trend may not be sustainable. Without seeing a pickup in spending among higher-income households, stronger income growth in lower brackets, or historic revisions, it’s hard to envision that the economy will grow enough in 2026 to necessitate interest rate hikes before the end of the year.
Conclusion
In conclusion, while Canada’s economy may not be experiencing the same level of disparity in consumer spending as the US, the trend may not be sustainable. Lower-income households may be dipping into savings to support spending, and the labour market will need to continue to improve to sustain spending among these groups. The Bank of Canada’s interest rate decision and new data on income and spending will provide more insight into the economy, and consumer spending plans remain weak due to high prices, economic uncertainty, and the cost of housing. As the economy continues to evolve, it will be important to monitor these trends and adjust expectations accordingly.