Consumers to keep spending, say TD economists

Consumers are likely to keep their wallets open in 2005, but the pace of wealth creation is expected to slow, encouraging individuals to moderate the pace at which they take on additional debt, say TD economists in the latest edition of the TD Consumer Pulse.

“As a result, consumers will continue to contribute to Canada’s economic expansion, but they cannot be looked to as the leading edge of growth,” said Eric Lascelles, an economist with TD Bank Financial Group.

TD notes that personal disposable income has grown significantly more slowly than consumer spending for over the last decade and a half

This resulted in the personal savings rate falling to zero in the third quarter of 2004, and contributed to a record high personal debt level of 113% of personal disposable income.

Despite this discouraging trend, there is no debt crisis looming in Canada, TD says. Indeed, personal bankruptcies are down, mortgage and credit card delinquency rates are low, and debt interest costs constitute the smallest share of personal disposable income on record.

Looking ahead, real consumer spending growth is expected to proceed at a moderate pace of 3% in 2005, supported by modestly faster income growth, but tempered by a slower pace of wealth creation and a softer pace of employment growth.

“Looking ahead, the consumer outlook is generally positive, and remains largely devoid of major problems,” stated Lascelles. “While employment growth is likely to slow, resulting in 150,000 additional jobs in 2005, the overall labour market picture will remain reasonably bright thanks to the outstanding job gains achieved over the past three years.”

Meanwhile, interest rates are expected to rise only modestly, keeping debt service costs under control. Nevertheless, consumers are likely to slow the pace at which they take on additional debt.

“Looking beyond 2005, the longer-term outlook for the Canadian consumer remains good. We expect to see a sustained stretch of faster personal disposable income growth and a rising personal savings rate, while asset returns should contribute significantly to wealth creation, all of which is supportive for consumer spending,” concluded Lascelles.