Thoughts

April 24, 2026 | 13:30

Canadian Consumer Still a Beacon of Light for Economy

Economist

Senior Economist and Director
Economics

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

Sal Guatieri

Senior Economist and Director
Economics

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

Canadian consumers are keeping the economy afloat in choppy waters. Apart from government expenditures, the only other major GDP component to expand last year was consumer spending, by 1.7% on a Q4/Q4 basis. These two weighty items (at over one-fifth and one-half of the economy, respectively) more than offset declines in business investment (due to trade-policy uncertainty), exports (due to U.S. tariffs), and residential construction (due to the slumping Ontario and B.C. housing markets) to keep real GDP growth just above the waterline (0.7%). Moreover, despite severe winter weather early this year, retail sales volumes jumped 5.7% annualized in the first two months of Q1 from Q4, likely marking the best quarter since before the trade war.

To be sure, shoppers lost steam last year. Real personal spending growth slowed to 1.7% (Q4/Q4) from 2.7% a year earlier. Demand for goods decelerated sharply to just 0.7%, amid declines in motor vehicles and household furnishings, though services held up better at 2.4%, with strong gains in accommodation as well as recreational and sporting services. The consumer downshift last year largely reflected three impediments: 1) still-elevated debt-service costs stemming mostly from mortgage resets; 2) stagnant population growth; and 3) weak consumer confidence. The Bank of Canada’s quarterly Survey of Consumer Expectations revealed negative sentiment prevailing through last year and into early this year, while Ipsos’ monthly survey suggests that confidence remained below average in March as gasoline prices surged. Although firmer retail sales highlight some resilience, the same three obstacles—and the new challenge of rising fuel costs—are likely to persist in 2026. So, we expect real personal spending growth to moderate further this year, to 1.3% (Q4/Q4).

Despite taking on water, the consumer should tug the economy forward again this year. Support stems from two forces: 1) sturdy wage growth, with average hourly wages up more than 4% y/y in March, as the jobless rate appears to be stabilizing; and 2) the wealth effect from rising equity markets, as the TSX has regained most of its Iran-related losses to extend a near-7% rally this year. Assuming these two tailwinds remain intact, Canada’s economy should ride out the storm, hopefully long enough for some of the dark clouds (Iran conflict, USMCA review, possible Section 301 tariffs) to pass.