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Eroding confidence casts shadow over consumer spending in early 201201/13/2012 by John Clinkard
According to the Conference Board in Canada’s most recent survey, the Index of Consumer Confidence dropped by 6.5% in December.
In the month, declines in all four of the Index’s key questions took it to its lowest level since May of 2009. The Board also reported a significant softening in plans to make a major purchase.
Based on the relationship between consumer confidence and retail sales, until the beginning of 2009 (see chart), the steady decline in the Index of Consumer Confidence since the beginning of 2011 suggests that retail sales will probably stagnate in the near term.
However, as the chart also indicates, the link between confidence and spending appears to have changed somewhat in the first half of 2009. At that time, retail sales began to gain strength despite a further deterioration of confidence caused in part by a very large decline in employment and a concomitant escalation in the unemployment rate at the beginning of the year.
One explanation for this apparent decoupling of confidence and spending is the impact of a drop in interest rates which encouraged consumers to head to the mall with their credit cards in hand despite increased concerns about future job prospects and both their current and future financial situation.
Fuelled by strong growth of full time employment and persisting very low interest rates, consumer spending gradually picked up strength over the course of 2011.
At the same time, however, three unrelated factors appear to have contributed to a steady deterioration of consumer confidence. First, heightened civil unrest in the Middle East and North Africa caused oil prices to spike by 33% which in turn caused gasoline prices to jump from an average of $1.14/litre in January to $1.32/litre in May.
Second, there was a significant increase in uncertainty about the potential impact of the European sovereign debt crisis on world financial markets.
The third and most troubling factor for Canadian consumers appears to be increased concern regarding their financial situation stemming in part from the fact that the average ratio of household debt to income in Canada has increased to a record 153.0%.
Going forward, there are signs that the economic outlook in Canada is becoming somewhat brighter due to an easing of concern regarding the European sovereign debt situation together with evidence of stronger growth in United States.
Having said this, the persisting very high ratio of debt to income along with the deterioration in consumer confidence casts a dark shadow over the near term outlook for retail sales and by implication the outlook for retail construction through the first half and possibly the second half of 2012.