Cracks are widening in the Canadian consumer’s spending ways and confidence has plummeted to multi-year lows. But more important to their revivals is the strength of the U.S. economy and its consumer, rather than the government’s deficit spending, says Mark Satov.
Satov, a frequent television commentator, is a business adviser and founder of management consultancy Satov Conultants. He also blames “irresponsible media” for scaring consumers in their reporting of business news, such as the federal government’s newly projected deficits.
The government running a deficit is the “perfectly rational thing to do,” according to Satov. Finance minister Bill Morneau announced deficits of $18.4 billion in 2016-17 and $15.5 billion in 2017-18 on Feb. 22.
“We had deficits of $30 billion and that was 20 years ago,” Satov says. “$18 billion is nothing today.” A $30 billion deficit 20 years ago would be roughly equivalent to a $40 billion deficit today.
“It [$18 billion] is half the number it used to be and our economy is larger [today].” The deficit is nothing for consumers to be worried about, Satov says.
A fear factor can exacerbate the difference between how consumers should behave based on economic fundamentals and how they actually behave, much like wild gyrations in the stock market.
Economy Fighting a Fever
Low oil feeds a low loonie, which is creating bigger headaches than benefits for the consumer. Consumers may be thrilled to save at the pump, but those savings are used up by higher costs of fresh produce. Fresh vegetables went up 18 percent year-over-year in January helping annual inflation to hit 2 percent—its highest level since late 2014, according to Statistics Canada.
“For the consumer, [the low loonie] makes it feel like their economy is weak,” Satov says.
He says the low loonie is a way for the economy to regulate itself. He gives the analogy of a person with a fever going to the hospital. “They say, ‘Oh, that’s good news because your body is fighting an infection,’ and it’s the same thing with the loonie.
“That’s how the invisible hand of economics helps us account for the fact that our economy is weaker,” Satov says.
While the economy crawls forward and uncertainty grips the consumer, it is a far cry from the dark days of 2009. “Everything that comes up now, it’s like, ‘I wish the economy would keep growing, but we’ll muddle through, we’ll figure it out,'” Satov says.
Earlier this month the Conference Board of Canada reported January’s consumer confidence fell to its lowest level since the end of 2011. It hasn’t recovered to the level before the financial crisis.
Of note, more than half of Canadians feel now is not the time for buying big-ticket items like a car or house.
December’s retail sales figures fell 2.2 percent—well more than the 0.9 percent decline economists forecasted. The drop was seen in 10 of 11 sectors and in 9 of 10 provinces.
RBC’s consumer spending forecast of a 2.5 percent gain for the quarter is now looking more like a less than 2 percent gain.
And the government’s infrastructure spending isn’t going to help consumer confidence in the near term, says Satov. He isn’t counting on the price of oil and resources, and China’s growth trajectory, to improve dramatically in the next six months either.
Instead, he feels an improvement in Canadian consumer confidence mainly rests on the shoulders of the U.S. consumer.
“If [the U.S. election] plays out in a way that helps consumer confidence there, I think consumer confidence there propels the global economy. That has not changed,” says Satov. “U.S. consumer confidence and U.S. spending is really important.” The U.S. is Canada’s export-oriented economy’s best customer.
Fortunately, the U.S. consumer is in far better fiscal shape than its debt-ridden and disillusioned Canadian counterpart.
Follow Rahul on Twitter @RV_ETBiz