Today’s data releases provide a number of insights on the Canadian consumer in the early stages of the current recession.
Statistics Canada reported that retail sales fell 11% in March from their level in February, with broad based declines in 12-of-19 product categories. The divide between purchases that increased and those that declined was split between essential and consume-at-home products versus non-essential and consume-away-from home products. The economic lockdown and physical distancing pummeled certain categories, including: auto sales (-35%), clothing (-46%) and footwear (-48%).
In a separate release, Statistics Canada reported new motor vehicle sales for April, and they plunged 75% year-over-year. The drop reflects the fact that new motor vehicle dealerships were deemed non-essential businesses. As the economy reopens, vehicle sales should rebound, but the volume of sales will remain lower than pre-CVOVID levels reflecting the economic fallout of the pandemic on consumer spending.
In contrast, essential products were flying off the shelves. For example food sales were up 19.5%. Beverages also climbed 8.6%, with alcohol purchases increasing 10.4%. Statistics Canada referenced the stockpiling of essential products, including housewares as potential drivers for these trends.
The disruption in consumer demand can be expected to have an impact on prices. US inflation data released this week showed that prices are rising for essential or consumed-at-home products, which can reflect several factors including increased demand and some supply disruptions. Taken together, it appears that essential retailers have had the ability to pass along higher costs to buyers. In contrast, prices are falling for products where sales have fallen because of the lockdown. I expect that Canadian inflation data will provide a similar picture on which vendors have more pricing power than others in next months’ Consumer Price Index report.
Decline in consumer spending is likely being tempered by the generous income support programs the government has put in place, like the CERB. However, I am concerned about the prospects for the recovery in expenditure when the current income support programs are scaled back and mortgage deferrals are ended in the coming months. It will be at this time that we will likely see more of the impacts from the spike in unemployment across the country. Moreover, the high level of household debt is likely to temper the recovery in consumer spending. Household leverage was a concern pre-COVID and it is likely to be a greater concern post-COVID. If consumers don’t want or aren’t capable of carrying more debt, their spending will be constrained by the income growth—and this is likely going to be modest.
On the topic of debt, the Canadian national balance sheet accounts for the first quarter were released today. While this report summarizes trends in assets, liabilities and net worth for the country by sector, I’ll focus on the consumer angle in today’s commentary.
· Household net worth dropped by $443 billion in the first quarter, largely reflecting the deep correction in financial markets in response to the pandemic. Although markets rallied in the second quarter, household net worth will still be below pre-COVID levels. It is worth noting that in economic models, historically every dollar of wealth reduction translates into a 1 to 3 cent reduction in spending over a number of quarters.
· Personal holdings of financial assets fell 15.5%. We know markets rallied in the second quarter, but they are still well below their prior peak, so there is a negative wealth effect on households.
· Deposits increased by 3.2% in the first quarter, reflecting a decline in personal expenditure that helped to fuel an increase in the personal savings rate form 3.6% to 6.1%. However, these numbers may be misleading. I suspect Canadians have not become big savers. I think spending partly dropped because many stores were closed and daily spending categories such as transit and gas were no longer required during lockdown. As the economy reopens and recovers, the personal savings rate is likely to decline, but perhaps not back to its pre-COVD level as some households may be inclined to have a greater financial buffer when the virus is still in circulation.
Canadians borrowed more in the first quarter, but this due to mortgage loan growth. Consumer credit and non-mortgage loans fell in the first quarter. I suspect the increase in mortgages reflected the strength of real estate activity before COVID-19 came to Canada. We are likely to see mortgages decline in the second quarter as housing activity fell during the lockdown. In contrast, I expect to see some households increase their use of lines of credit when the labour market is weak.
The household debt as a share of personal disposable income rose from 175.6% in the fourth quarter of 2019 to 176.9% in the first quarter of 2020. Looking ahead, I expect the ratio to rise sharply, perhaps as high as 230%—not primarily due to growth in debt but rather the decline in personal income from the spike in unemployment.
There was, however, positive news on the personal debt service front. Interest and principal payments on household debt as a share of personal disposable income edged down from 14.81% to 14.67%. Again, the ratio is likely to jump when the income shock to households shows up in the second quarter numbers.
Consumption is 60% of the Canadian economy. Thus, monitoring consumer behaviour is a critical dimension to evaluating the impacts of the pandemic. Overall, we expect that consumer spending will be a significant contributor to the economic recovery. However, consumer spending growth will be tempered by high unemployment, high indebtedness, and behavioral responses to the continued health risks. This is one of the reasons that a slow recovery is likely.
