High consumer debt and the negative wealth effects from losses in equity markets won’t hurt consumer spending said TD economists Craig Alexander and Claudia Lokody in the inaugural issue of the TD Consumer Pulse.

Alexander, senior economist at TD Bank Financial Group, said, “While there is a risk that purse strings may be tightened in the near term, there is good reason to believe that Canadian consumers will not throw in the towel and that personal expenditure will remain healthy, yet not booming, over the next six quarters.”

Favourable labour market conditions will support healthy real personal disposable income growth at an average annualized pace of 2.9% over the next six quarters,” predicted Alexander.

He estimated that the fallout from the recent decline in equity wealth could cut 0.5 percentage points off the annual rate of personal expenditure growth in 2002 and 2003. However, he also suggested that the fallout could prove more limited with rising real estate prices offsetting a large portion of the decline in wealth from lower equity valuations. “The weakness in equities may curtail personal expenditure on big-ticket and luxury items, but it is unlikely to prompt a major retrenchment in overall consumer spending,” noted Alexander.

Canadians have become heavily indebted over the past decade, with personal liabilities rising from 93%of personal disposable income in 1990 to 112% in 2001. However, fears that the deteriorating state of personal finances could lead consumers to scale back their spending are overblown. “Although some consumers may have acted imprudently, the decision by the vast majority of households to take on more debt has been a rational response to the low and stable interest rate environment created by the Bank of Canada over the past decade,” remarked Alexander.

“There is little reason to believe that the expected rising trend in interest rates over the coming 18 months will lead to a significant squeeze on personal finances or personal expenditure,” he said.

As purchases of durable goods moderate, there is a risk that personal expenditure growth may slow in the third quarter of 2002, TD said, but this will represent a transition to more balanced spending on overall goods and services. The key drivers of consumer activity will remain positive, with job gains, declining unemployment, rising incomes and high levels of consumer confidence acting in concert to support personal expenditure.