Focus

December 11, 2020 | 12:36

Canadian Consumer Outlook: If You Open It, They Will Come

Economist

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Priscilla Thiagamoorthy

Economist
Economics

Priscilla joined BMO Capital Markets in 2016 and plays a key role in analyzing Canadian household trends and the... (Read more)

Michael Gregory , CFA

Managing Director, Deputy Chief Economist and Head of U.S. Economics
Economics

Michael Gregory is Deputy Chief Economist and Head of U.S. Economics for BMO Capital Markets. He manages the tea... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Sal Guatieri

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Jennifer Lee

Director and Senior Economist
Economics

Jennifer has been with BMO Capital Markets Economics for over two decades and is perhaps best known for her high... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Priscilla Thiagamoorthy

Economist
Economics

Priscilla joined BMO Capital Markets in 2016 and plays a key role in analyzing Canadian household trends and the... (Read more)

Michael Gregory , CFA

Managing Director, Deputy Chief Economist and Head of U.S. Economics
Economics

Michael Gregory is Deputy Chief Economist and Head of U.S. Economics for BMO Capital Markets. He manages the tea... (Read more)

Benjamin Reitzes

Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Sal Guatieri

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Jennifer Lee

Director and Senior Economist
Economics

Jennifer has been with BMO Capital Markets Economics for over two decades and is perhaps best known for her high... (Read more)

Feature

Canadian Consumer Outlook: If You Open It, They Will Come

In a year of living dangerously for forecasts, the resiliency of consumers has been a rare source of upside surprise. After the spring lockdowns, retail sales almost everywhere carved out a perfect and rapid V-shaped recovery, flying in the face of bearish expectations. The quick comeback was little mystery as massive and immediate government income support backstopped the abrupt turnaround. And with Canada leading the global fiscal spending pack, households remain extraordinarily well-supported. Between that robust support, a large build-up of savings, and pent-up demand, we expect the consumer recovery to broaden to services in 2021. But this forecast cannot be constructed along conventional lines; ultimately, spending trends will be at the mercy of how the virus and the vaccine progress in coming months.

Overall Spending Trends

Even with the fast recovery in retail sales, overall Canadian consumer spending will still drop nearly 6% in 2020 (6.6% in real-terms), a record decline.
While consumers spent with alacrity on durable and semi-durable items, driving a fast recovery in goods, spending on services was still down 10% y/y in Q3. The split between goods and services is a complete role reversal from past cycles, when services were normally the buffer.
The weakness in services is almost entirely due to health concerns, not economic concerns. A full recovery in services, and thus overall spending, realistically awaits an end to the pandemic.

Spending Trends by Sector

Household shopping habits changed drastically this year with winners and losers emerging in the various spending categories.
The ability to work from home gave consumers an insatiable demand for furniture and household equipment, up 10% y/y in Q3.
At the other end of the spectrum, it’s no surprise that spending on hotels (-54% y/y) and restaurants (-22% y/y) eroded heavily.
Perhaps the biggest winners of all were on-line retailers, with e-commerce sales more than doubling at the height of the lockdown and remaining elevated (+74% y/y in September).

Savings Trends

The constraints on services spending, combined with robust disposable income growth, lifted Canadian savings in an unprecedented fashion.
The household savings rate hit a record 27.5% in Q2, versus an average rate of just 1.4% last year. It faded only a bit in Q3 to 14.6%.
We estimate the savings surge so far this year at $150 billion (near 7% of GDP) above normal. These “excess savings” provide an enormous potential war chest to drive spending in 2021.
A recent Bank of Canada report finds that the top income quintile has boosted savings the most (given their past big outlays on services, like travel). Yet, even the bottom income quintile has seen savings rise, reflecting government income support.

Income Breakdown

The rise in incomes has been driven primarily by the overwhelming degree of government support.
Spring lockdowns sent employee compensation tumbling 7% y/y in Q2, the biggest drop ever.
The rush of fiscal aid more than offset the loss in wages, pushing household income to new heights.
Transfers dropped notably in Q3 as some employees returned to work. Even so, transfers are still up almost 37% since the end of last year, while worker compensation is about 2% lower.

Confidence

While government support looks to remain strong, Canadian consumer confidence has nonetheless sent mixed messages of late. After an initial bounce in the summer, households turned more cautious amid the second wave and increased restrictions.
The Conference Board index stalled last month, far below pre-virus levels and not far from the depths in the 2008/09 recession. It’s a different story in the U.S., despite a tougher experience with the virus, where consumer confidence has held up much better than the prior recession.
In contrast, Nanos Research finds Canadian sentiment recently hit the highest since mid-March—a strong housing market has buoyed this index.

Borrowing Trends

With more cash and muted spending on services, households worked on paying down some consumer debt, now almost 4% lower since the highs of March.
Year-over-year levels have fallen for five straight months, something not seen since the early 80s.
Still, more than 70% of total household borrowing comes from mortgage credit, which has picked up this year (+5.7% in September), amid the strong housing market.
Overall, household borrowing has slowed slightly this year to a 3.5% pace from 4.1% in 2019.

Debt Trends

For years, Canada’s lofty household debt was seen as a key vulnerability to the economic outlook. But massive government support, mortgage deferrals, and the savings surge have improved many household financial metrics.
For example, the household debt-to-income ratio has taken a big step back this year after hovering near all-time highs. This may prove fleeting, as incomes revert to normal in 2021.
Debt-service burdens also eased considerably, much deeper and faster than during the financial crisis as rates were quickly slashed to record lows.
On the other side of the balance sheet, rising real estate values have been an important driver in improving household net worth in 2020.

Bankruptcies

In complete contrast to every recession before it, consumer insolvencies fell this year. In the first 10 months of the year, they are down nearly 30% y/y (-38.3% y/y in October).
The rapid roll-out of support measures mentioned above, as well as the deep dive in borrowing costs, helped forestall a wave of insolvencies. Even as the grace period on mortgage deferrals has started to draw to a close, consumer bankruptcies remain at low ebb.
The underlying strength in home prices across the country also suggest that even in a much tougher economic backdrop, strained borrowers would not be forced to sell their homes into a falling market—quite the opposite.

Outlook for Savings

After reaching a record high in the spring, we expect the savings rate to grind steadily lower in the coming year, assuming restrictions steadily lighten.
A key debate is whether there will be even a partial permanent change in household behaviour, to somewhat larger precautionary savings. We suspect that while some of the big buffer built up in the spring will stick, ultimately consumers will revert to a very low savings rate (amid extremely low interest rates).
Note that the bulge in personal deposits at banks lasted about three months, before returning quickly to pre-virus growth trends.

Bottom Line: There are many ways in which this cycle has been like no other. But the relative strength of household finances—courtesy of historic government support—is perhaps the single biggest difference from past downturns. And that financial health, highlighted by the $150 billion mountain of excess savings, suggests that Canadian consumers are prepared to spend… when they are able to do so again in full measure. Witness the speed and vigour with which consumers returned to stores and malls as they partially re-opened this summer. Accordingly, we believe that consumers will need little policy prodding to ramp up spending on services, when health circumstances allow. After a record setback this year, we would look for spending to rebound almost 6% in 2021, and by more than 7% when inflation is factored in.