Boom in consumer spending fuels Canadian economy

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Canadians are feeling more chipper than they have in years and they're demonstrating their confidence by opening up their wallets.

Their recent outburst of spending helped propel Canada's economy to its strongest quarter in six years, according to a Statistics Canada report on Thursday. Gross domestic product blew past market expectations, expanding at a 4.5-per-cent annualized rate during the second quarter.

The surprise acceleration came on the heels of a robust first quarter and capped the economy's best first half since 2002.

"Even the naysayers will struggle mightily to find fault with this rock-solid report," Doug Porter, chief economist at Bank of Montreal, said in a note.

While the red-hot expansion is likely to cool somewhat in the second half, "the economy is now on track to grow by a bit more than 3 per cent for the full year, challenging for the strongest growth rate since the height of the tech bubble in 2000."

The upswing during the second quarter was broad based, with impressive gains in exports, particularly oil, providing a powerful lift.

However, the single most intriguing theme was the resurgent consumer.

Household consumption rose at an impressive 4.6-per-cent annualized rate during the second quarter after expanding at a 4.8-per-cent pace during the first quarter.

Shoppers are walking with a strut they haven't shown for nearly a decade. The Conference Board of Canada reported this week that its Index of Consumer Confidence had surged to its highest level since the early days of the financial crisis in November, 2007.

The upswing in national exuberance reflects improved optimism about future finances and job prospects, as well as brightening sentiment about making major purchases, the Ottawa-based think tank said.

Particularly encouraging is that Canada's heavily indebted consumers aren't paying for their consumption binge by plunging even deeper into hock. The household saving rate rose from 4.3 per cent in the first quarter to 4.6 per cent in the second quarter, according to the Statscan numbers released on Thursday.

Shoppers' ability to save more while also spending more reflects solid gains in income.

"The 6.6-per-cent annualized increase in real disposable incomes, the biggest increase in seven years, explains the consumption and savings surge," Krishen Rangasamy of National Bank of Canada wrote.

Can the consumer boom be sustained? Skeptics argue that the recent outburst of strong growth will encourage the Bank of Canada to hike interest rates, perhaps as early as next week, to put a lid on inflationary pressures. Higher rates will also put increasing pressure on household budgets.

"With household debt at record highs, rising household borrowing costs will likely slow the pace of consumption growth from the third quarter onwards," David Madani of Capital Economics said.

David Rosenberg, chief economist at Gluskin Sheff + Associates Inc. in Toronto, also doubts that output can keep expanding at anywhere near its recent pace.

"The economy is running on fumes from an array of non-recurring sources," he wrote in a note earlier this week. A cheap loonie combined with a bottoming of the oil patch crisis and a psychological lift from strongly rising home prices to generate a burst of prosperity in recent quarters, but all those factors are now in the rear-view mirror, he said.

For their part, optimists can point to a brightening global outlook. This week, the U.S. Commerce Department revised upward its estimate of second-quarter economic growth to a 3-per-cent annual rate, the quickest pace in more than two years. Recent readings from the euro zone have been encouraging, too.

In Canada, economists were quick to note that the monthly figure for June came in at 0.3 per cent, well above expectations. The strong conclusion to the quarter argues more good news may be on the way, according to Mr. Porter of Bank of Montreal.

"Instead of setting the stage for some cooling in the second half, the solid June result suggests that growth just kept chugging along," he said.