Spending likely to slow as middle-class income stagnates

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Canada's middle class has good reason to wonder why it's not getting ahead.

Median after-tax income for families was $68,000 in 2011, virtually unchanged from a year earlier, Statistics Canada's annual report on income trends shows. It was the fourth straight year "without significant change in after-tax income," the agency said.

Slow growth in incomes, rising costs for shelter and food and low interest rates help explain why Canada's household debt levels hit record highs in recent years. And they underscore what many economists – and the Bank of Canada – have long predicted: that consumer spending will no longer be the key driver of economic growth in the country.

"There's definitely been quite a bit of pressure on the middle class," said Douglas Porter, chief economist at Bank of Montreal. While low borrowing costs are a chief reason for still-high debt loads, another factor "is in an attempt by the middle class to maintain or increase their living standards – at a time when income growth is actually quite constrained."

A range of factors explain the shift, from automation that is reducing the need for middle-skilled workers to outsourcing and changes in the labour market, which is increasingly split between low- and high-skill jobs.

Mr. Porter doesn't buy into the notion that the middle class in Canada is disappearing, a theme that has garnered much attention in the United States. But the squeeze means he expects consumer spending will rise at a slower pace than the economy as a whole in the next few years.

The income numbers are expressed in constant dollars, which means they factor in inflation. While headline inflation shows a benign environment for consumer prices, it may not feel that way for many Canadians, because non-discretionary spending on the big items – shelter – and the frequent items – groceries – are rising at a much faster pace than the official inflation rate. A separate Statscan release Thursday showed the five-year cumulative food price inflation between 2007 and 2012 is one of the highest in 20 years, led by gains in staples such meat, bread and eggs.

Many Canadians in the middle feel like they're losing ground, according to a consumer survey released Thursday. It found those whose finances are worsening tend to be people over the age of 45 and in the middle-to-lower-income brackets. The more affluent one is, the more likely their fortunes are to have improved in the past year, said the report by ad agency Bensimon Byrne, based on a quarterly survey of 1,500 Canadians.

Traditional aspirations for an ever-improving life are slipping away, said Jack Bensimon, president of the agency, in an interview, adding that the pressures also stem from eroded retirement savings, rising costs of postsecondary school and

hammered stock market portfolios.

He sees growing bifurcation in the economy, marked by booming dollar stores on one end and growth in luxury brands at the other. In the middle are people who still focused on cost efficiency. And that has implications for the companies he works with.

"We get very worried when we see this kind of bifurcation happening because so many of the great Canadian institutional brands, whether they be fast-food companies, retailers, car brands, whatever, have relied on a large middle class and a consistent message that appeals across the country to a majority of people."

Indeed, some firms are witnessing shifts among consumers. In Canada, higher unemployment, high debt loads and a cooling housing market have hurt consumer confidence and discretionary spending, Tim Hortons said in its earnings statement last month.

Still, the trend is not uniform. The middle class may be stagnating in most of Canada – but not Alberta. It was the only province where families saw a solid improvement in median after-tax income, growing to $83,800 in 2011 from $80,400 a year earlier.

By contrast, single people in Ontario are faring worse, with median income falling to $25,900 from $28,600, the Statscan report shows. Families in Alberta had the country's highest median after-tax income, followed by Saskatchewan and Ontario.

The analysis doesn't include hours worked or wage rates, which would show whether incomes have grown a little because people are simply working more – in other words, whether middle-income households "are running harder just to stand still," noted Miles Corak, economics professor at the University of Ottawa.

Some households are faring better – two-parent families with children saw their median after-tax income rise by $2,500 between 2010 and 2011. However, there was "no significant change" in median incomes for other family types. Single people, for example, saw no change in median after-tax income.

Poverty rates, meantime, haven't changed much. Three million Canadians, or 8.8 per cent of the population, lived in low income in 2011, unchanged from 2010, according to the after-tax low income cut-offs. More than half a million children – or 571,000 aged 17 and under or 8.5 per cent lived in low income in 2011, also unchanged from a year earlier.