August 29, 2014 1:12 pm

Canadians on fresh spending spree, despite lofty debt loads

WATCH: Statistics Canada says the economy soared in the second quarter of this year. Is it a one-off jump or the beginning of a positive trend? Mike Drolet reports.

Should we call it borrowed prosperity? Canadians are spending lavishly again on new vehicles, home renovations, clothing — you name it, and we’re opening up our wallets to buy it.

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And all that spending has provided a big lift to the economy, which Statistics Canada said Friday is growing at a much better rate than expected.

“Everything is firing on all cylinders right now. Commercial and residential and retail all have pretty strong fundamentals,” Scott Baker, a senior vice-president at MacNicol & Associates Asset Management in Toronto, said.

MORE: Canadian economy revs up, growth hits 3.1%

Baker has a good vantage point on Canadians and our economy. His company manages investments in malls, apartments and other properties. Occupancy rates and rents are high, he says, fueled by healthy demand from shoppers and tenants.

“Household spending continues to increase,” Statscan’s latest economic update said dryly on Friday.

Indeed, sales of cars and other big-ticket items surged nearly 15 per cent in the spring and early summer, the latest data available. Residential investment in things like home building and renovations also jumped a unexpected 11.9 per cent.

MORE: Consumers snapping up new vehicles at ‘breakneck’ pace

The spending spree has Baker and other experts scratching their heads. “I’m a bit puzzled by it, to be honest with you,” he said.

Sure, last winter was a nightmare, putting a chill on virtually everything including consumers’ appetite to shop. Some bounce-back was expected.

But most experts expected things to remain relatively cool this year, as households dig out from record debt levels.

No one saw coming the current clip in spending.

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What’s fueling the pick up? A combination of two sources of cash: savings and debt.

The average amount of income being parked into savings by Canadian households has dropped to 3.9 per cent, Statscan said Friday – or the lowest level since 2010.

“They’re funding some of this through lower savings,” Nick Exarhos, an economist at CIBC, said.

Ultra low interest rates are serving as a powerful deterrent for folks to lock up their money in a bank account given such paltry returns, the economist added.

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On the other side of the ledger, consumers also appear to be financing higher spending habits through elevated use of debt – i.e. credit cards and bank lines of credit.

RBC, the country’s biggest lender, said earlier this week Statscan data set to be released next month is likely to reveal rising household debt levels relative to incomes, which would represent the resumption of households piling on debt instead of paring it back.

MORE: Are Canadians taking on too much consumer debt?

Still, the spending spree isn’t expected to last. RBC said its most recent data shows Canadians once again “heeding” warnings from the Bank of Canada and other experts and are again dialing back on debt.

That’s likely to suck the wind out of the latest shopping boom, experts say. Growth in home loans is also slowing, representing another drag coming from the housing market.

“It’s unclear if domestic demand can maintain this pace over the rest of the year as housing softens and debt-burdened households cap consumption spending,” Krishen Rangsamy, chief economist at National Bank Financial said.

“The rebound in household consumption and residential housing investment can hardly be counted upon to bolster economic growth in the future, given the size of household debts and oversupply in the housing market,” Toronto-based Capital Economics said in a note.

“I don’t think we’re going to see another leg of the housing boom, and don’t think we’re going to see consumer re-leveraging,” CIBC’s Exarhos said.

“I think we’re at a point where there isn’t much more room.”

© Shaw Media, 2014

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