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This transcript has been generated using machine learning technology. While this technology was trained with CIBC terminology, it may contain errors.
Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets, a podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.
Avery Shenfeld: Welcome everyone to another edition of CIBC Economics&#8217; Eyes on the Economy podcast. I&#8217;m Avery Shenfeld, Chief Economist at CIBC, and today I&#8217;m joined by Andrew Grantham, an executive director on our economics team, to talk about some work he&#8217;s done looking at Canadian consumer spending, why it&#8217;s been perhaps less than we would like it to be up until recently, and why the prognosis for looking ahead into 2027 might be somewhat better. So Andrew, let&#8217;s start with where we are now. You&#8217;ve made a point that the situation in terms of the per capita growth rate may not be as bad as it&#8217;s purported to be. Why is that?
Andrew Grantham: Yes, when we look at consumer spending within the national accounts, within the GDP data, that consumer spending does not include the spending of non-permanent residents, because non-permanent residents, their spending is included as an export. So whenever we&#8217;re looking at per capita spending, we also need to strip out those non-permanent residents. And so when we look at per capita consumer spending, stripping those out, what we see is that word that is typically been used to describe the Canadian economy and consumer spending recently, which is resilient. We&#8217;ve seen that consumer spending on a per capita basis has been okay, but okay is not particularly strong. And even when we look at per capita spending on this basis, we&#8217;re still roughly about 1% below the pre-pandemic trend. So resilient, maybe better than some people think on a per capita basis, but still not strong and certainly room for improvement going forwards.
Avery Shenfeld: Now, one of the things that&#8217;s been holding back per capita spending in volume terms has been the squeeze from higher gasoline prices, which in recent months has come, has faded a bit, and is now back again. looking ahead, where do you see that going and what could start to outweigh that squeeze if in fact the war in the Persian Gulf area settles down and we actually see lower gasoline prices?
Andrew Grantham: Yeah, it&#8217;s definitely difficult to put a 100% accurate forecast on this at the moment, given the volatility that we&#8217;ve seen in terms of global oil prices, gasoline prices. But what we see when we look at disposable incomes and particularly in an inflation adjusted terms is that we don&#8217;t necessarily need gasoline prices to come back down significantly for there to be less inflation next year and so for there to be stronger growth in disposable incomes in inflation adjusted terms. As long as we don&#8217;t continue to see gasoline prices rising, we should see that disposable incomes, at least disposable income growth, will look a little bit better in 2027 after adjusting for inflation than it has done this year. And that&#8217;s particularly the case because we do now have expanded benefits, the groceries and essentials benefits from the federal government which will support some spending for certain households. Now, if anyone looks at the aggregate numbers, the increase in benefit does not look particularly big. It&#8217;s only about 0.1 % of GDP, for example. But that includes the incomes of everybody, including people who aren&#8217;t going to get this benefit. And so when we look at these benefits as a proportion, of the incomes of the people who are actually getting that benefit, then you actually see that this is a fairly significant boost. And these are the people who generally have the higher propensity to consume out of their income. So this could be a fairly significant boost to spending in the future as well.
Avery Shenfeld: So the benefit provided in effect as a offset to cost of living will do a better job, I suppose, offsetting it when the cost of living isn&#8217;t going up so much in 2027. That&#8217;s certainly what we hope if the war settles down. There is a unique Canadian story in this as well, unique in the sense that it didn&#8217;t apply to the US, which has to do with the squeeze that some Canadians have felt in terms of their spending power owing to mortgages that were renewing at higher rates. How do you see that evolving in 2027? And could that also give a little more elbow room for household spending next year?
Andrew Grantham: It should do, yes. Like, if we rewind two or three years ago, this mortgage cliff as people were calling it was pretty much all anyone ever wanted to talk to us about. This was obviously before President Trump was re-elected and before we had to do all of this work on tariffs and the impact of that on the Canadian economy. Kind of how we would get through these mortgage renewals was a significant issue. Now, people have forgotten a little bit about this because it hasn&#8217;t led to the increase in defaults within the mortgage market that maybe people thought it would when the word cliff was put on to this. But that doesn&#8217;t necessarily mean it hasn&#8217;t been constraining people&#8217;s spending. Now, what stats can do, they actually release some data that shows consumer spending for the type of household. So type of household could be a homeowner with a mortgage, a homeowner without a mortgage, or a renter. And what that data has shown really over the last five or six years as we&#8217;ve gone through these mortgage renewals is that obviously people with mortgages have had to put more money aside to pay for those mortgages. They&#8217;ve had less discretionary income, less discretionary spending. And so when we look at that, their discretionary spending has very much lagged other households.
As we go through into 2027 and 2028, what we&#8217;ll find is that there&#8217;s a lot fewer households that will be remortgaging at a higher interest rate. A lot of those people who were remortgaging at higher rates took out mortgage rates during the pandemic. Many of those have actually refinanced now. And so the hits from those mortgage refinances to people&#8217;s disposable incomes will be much less in 2027 and through into 2028.
And judging by the data that we have on people&#8217;s spending patterns and how much that has restrained the discretionary spending of those households, that should free up more money for more discretionary spending and be a positive for overall consumer spending as well.
Avery Shenfeld: And one final issue you raised was related to demographic. So Canada, like the US, like many European countries like Japan, we have an aging population. The baby boomers have been moving past sixty-five. And so we have this bulge of people who are now sixty-five and over. And you took a look at some of the statistics on their spending and their incomes. What did those show? And what does that say about the room, perhaps, for a runway of higher spending by that group of Canadians?
Andrew Grantham: Yes, so the spending among kind of the upper age groups, let&#8217;s call them 65+ as StatsCan puts it, is obviously growing as a proportion of total consumer spending. The interesting thing though is it&#8217;s only growing as a proportion of overall consumer spending because of the ageing demographics. It is not because that group is actually spending more on a per household or per capita basis. And actually what we&#8217;ve seen over the last five or six years is that spending in the older age groups has actually lagged other age groups when it comes to per capita or per household spending. The reason why that&#8217;s interesting is that those are the households that have tend to see the biggest wealth growth. They&#8217;ve tended to see the biggest income growth even over that same time period. So they&#8217;re obviously being a little bit more cautious today about spending than maybe they were five or six years ago. Now that could be due to worries over inflationary pressures that maybe could be worries over, you know, whether family members, for example, can afford to get on the housing market. But what it does show is that there&#8217;s an ability there from an income and a wealth point of view for those older households to spend more going forwards, maybe as inflation comes back down, as those wealth gains increase again or further then that&#8217;s definitely an area of the economy, a demographic group that we could get even more spending from in the next two or three years.
Avery Shenfeld: Now, of course, in the last year or two, we&#8217;ve had house prices come down. And that does affect some of those older Canadians who may have thought about cashing in on their house, downsizing and using that to finance spending. Some of that&#8217;s been eroded away. Of course, the houses are still worth a lot more than they paid for them. How do you see that evolving house price story factoring in not only to their spending, but spending by Canadians in general who have money tied up in home equity?
Andrew Grantham: Yeah, this is the wealth effect that we have looked at previously in other reports. But the good news when we kind of think about this wealth effect from a going forwards point of view is that we are currently seeing some signs of stabilization in the housing market. Not significant strength, but we&#8217;re certainly seeing that maybe house prices are starting to level off on average on a national basis. And so what has been may perhaps a negative impact on people&#8217;s spending over the last few years. House prices coming down, that wealth effect having a negative impact on consumption will turn maybe not into a positive straight away, but it will certainly level off. And so that negative impact will go away. And that in itself will be a positive when we look at the change in consumer spending from 2026 as we move into 2027.
Avery Shenfeld: Well, that certainly will be helpful. In fact, all of these various factors that could help consumption could be important and maybe more important if we continue to face headwinds on the trade side. As we&#8217;re speaking today for listeners who are listening to this at a later date, we were still awaiting the results of the Canada-US trade talk. So we&#8217;ll have more to say on that issue as the details of a deal or a non-deal come out in the coming days.
But until then, I think we&#8217;ll wrap this edition up here. Thanks for joining us on our Eyes on the Economy podcast. Until next time, we at CIBC Economics will be keeping our eyes on the economy and calling it as we see it.
Disclaimer: The information and data contained herein has been obtained or derived from sources believed to be reliable, without independent verification by CIBC Capital Markets and, to the extent that such information and data is based on sources outside CIBC Capital Markets, we do not represent or warrant that any such information or data is accurate, adequate or complete. Notwithstanding anything to the contrary herein, CIBC World Markets Inc. (and/or any affiliate thereof) shall not assume any responsibility or liability of any nature in connection with any of the contents of this communication. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice. CIBC Capital Markets is a trademark brand name under which different legal entities provide different services under this umbrella brand. Products and/or services offered through CIBC Capital Markets include products and/or services offered by the Canadian Imperial Bank of Commerce and various of its subsidiaries. For more information about these legal entities, and about the products and services offered by CIBC Capital Markets, please visit www.cibccm.com. Speakers on this podcasts are not Research Analysts and this communication is not the product of any CIBC World Markets Inc. Research Department nor should it be construed as a Research Report. Speakers on this podcast do not have any actual, implied or apparent authority to act on behalf of any issuer mentioned. The commentary and opinions expressed herein are solely those of the individual(s), except where the speaker expressly states them to be the opinions of CIBC World Markets Inc. Speakers may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expect continuing analysis, views or discussion relating to these instruments discussed herein. Any information provided herein is not intended to represent an adequate basis for investors to make an informed investment decision and is subject to change without notice. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice.

Canadian consumers: Ready to spend again?

CIBC Economics

Avery Shenfeld

Managing Director and Chief Economist

CIBC Capital Markets

Andrew Grantham

Senior Economist

CIBC

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