Briefing highlights
- Canadian spending can’t last
- What to expect in GDP report
- Global stock markets perk up
- New York poised for higher open
- Loonie sinks to near 79 cents
- TD profit climbs in ‘great quarter’
- Magna pitches self-driving system
The 'high life'
Canadians are "still living the high life," spending and borrowing at the expense of savings.
But that can't last much longer, observers warn.
Statistics Canada is expected to report this morning that the economy surged in the second quarter at an annual pace of between about 3.5 and 4 per cent, buoyed by our spending habits.
Indeed, analysts believe those habits accounted for about two percentage points of that gain, meaning consumers again were pumping up the economy.
"Household consumption grew strongly in the second quarter, supported by a further decline in the saving rate and faster credit growth," David Madani, senior Canada economist at Capital Economics in Toronto, said in a report titled Households Still Living the High Life.
"With banking regulations being toughened, however, those trends won't be sustained. Nor will households be able to count on rising home equity as a substitute for traditional saving."
Here are six pieces of the puzzle:
1. By volume, retail sales climbed 0.5 per cent in June, bringing to 8.8 per cent the annualized gain in the second quarter , and that "on the heels of two stellar performances in the previous two quarters," noted Toronto-Dominion Bank senior economist Fotios Raptis. He also noted that "recent strength in consumer spending has been fuelled by the purchase of consumer durables, big-ticket items such as cars, trucks, furniture and appliances."
2. That "extravagant spending spree" probably means real household consumption rose in the second quarter at an annual pace of 3.6 per cent from the first three months, according to Mr. Madani's calculations. That's how you get to the expectation that consumption added two percentage points to economic growth, or almost twice the rate of the average over the last five years, he said.
3. The household saving rate is down to 4.3 per cent. Real disposable income lagged in the first quarter, though may have rebounded in the second with growth of 2.7 per cent, Mr. Madani said. What that would mean: "If household consumption grew as strongly as we estimate, then that spending spree implies a further drop in the aggregate household sector saving rate, possibly to just below 4 per cent, which would be the lowest rate in almost three years."
4. As the entire world knows, and likes to comment on, Canadian consumers have one of the most worrisome debt burdens anywhere. Borrowing has jumped by almost 6 per cent this year, with credit growth outpacing that of wages and salaries over the last two years, Mr. Madani said. Added Mr. Raptis: "The average Canadian household is highly indebted … largely owing to mortgage growth when the housing market was in an up-cycle in an ultralow interest rate environment."
5. The nature of our borrowing is changing. A look at the most recent statistics shows the "mild upswing" in borrowing is the result of consumer credit, such as loans and credit cards, rather than mortgages, said Bank of Montreal chief economist Douglas Porter. Mortgages outstanding have jumped 6.3 per cent on an annual basis, he said, while consumer credit has climbed by 4.4 per cent. But the pace of mortgage growth is similar to a year ago, while the rate of increase in consumer credit has perked up from 3.5 per cent last year and 3 per cent a year earlier.
6. Which brings us to what happens when rates rise, when you're spending fast and borrowing more. The Bank of Canada has already raised rates once, and will do so again. Which means the high life noted by Mr. Madani is going to end.
"Given the reliance of Canadian consumption on household credit and house price-related wealth effects … it's difficult to make a case that the recently observed pace of consumption growth can continue in a rising interest rate environment, especially absent a substantial increase in household income, Mr. Raptis said.
"Moreover, new housing regulations introduced by the provincial government, together with increased mortgage lending oversight by OSFI, seems to have at least temporarily knocked the wind out of the GTA housing market, but the ripple effects on the Canadian economy are still forthcoming."
TD projects that the rise in consumption will slow in 2018 to just 1.7 per cent from more than 3 per cent this year.
"Canadian automotive, furniture, and appliance dealers take note: Enjoy the good times while they last," Mr. Raptis said.
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The U.S. dollar is shining like a new penny
London Capital Group senior market analyst Ipek Ozkardeskaya
Stocks climb, loonie sinks
Global markets are perking up so far and the U.S. dollar is climbing, driving the loonie down to almost 79 cents (U.S.).
Playing into the markets are Wednesday's economic readings from the U.S., and manufacturing numbers from China today.
"Even though the North Korean tensions are still bubbling away in the background, traders are keen to move back into equities while the sense of panic has evaporated," said CMC Markets analyst David Madden.
Tokyo's Nikkei gained 0.7 per cent, though Hong Kong's Hang Seng lost 0.4 per cent, and the Shanghai composite 0.1 per cent.
In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were up by between 0.6 and 0.8 per cent by about 7:15 a.m. ET.
New York futures were also up, and the Canadian dollar traded as low as 78.97 cents and as high as 79.24 cents.
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TD profit climbs
Toronto-Dominion Bank is boasting a "great quarter," with a 17-per-cent boost in profit.
TD profit climbed in the third quarter to $2.77-billion, or $1.51 a share, diluted, from $2.34-billion or $1.24 a year earlier.
On an adjusted basis, earnings per share climbed to $1.51 from $1.27.
"This was a great quarter for TD, reflecting impressive earnings and revenue growth, better credit performance across all our businesses, and lower insurance claims," said chief executive officer Bharat Masrani.
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