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Economic Quick Take from the Conference Board of Canada

ByPatricia Dent
Here are highlights and key insights into our latest Index of Consumer Confidence release:

The Index of Consumer Confidence decreased by 11.7 points in May to reach 88.1 points (2014 = 100). This is the largest monthly decrease since the pandemic’s onset. Many households continue to feel inflation’s pinch, with optimism over current finances edging lower this month to 12.4 per cent. At the same time, the share of those sharing a pessimistic view of their current finances crept higher to reach 29.1 per cent, a 3.4 percentage points increase from last month.

Similarly, worries about future finances continued to be a pea in consumers’ shoes. Of those surveyed, 25.3 per cent shared a negative outlook on future finances six months from now. This remains well above the 16.3 per cent average witnessed in 2019.

Positive attitudes towards major spending still have a long road to recovery when contrasted with the average sentiment of 31 per cent in 2019. Only 14.8 per cent of survey respondents believed now is a good time to purchase large-ticket items. Higher borrowing costs on the horizon are likely to affect consumers’ willingness to spend on these items, changing future consumption patterns.

Employment in April made minimal gains, with total employment rising by 15,000, signifying that the Canadian Economy is at full employment. Overall, Canadians are still confident that more job opportunities will surface in the next six months, albeit less certain than the previous month. Canadians’ share of optimistic views on future job prospects is at 21.4 per cent—3.5 percentage points lower than last month.

Key Insights

With inflation at 6.8 per cent, the highest since January 1991, affordability remains a key concern for consumers. In addition, the re-opening of the hard-hit hospitality sector will likely exacerbate the current inflation fire with increased travel numbers. This is excellent news for businesses that were hit hard during the pandemic but makes sharper price growth within this sector highly likely, especially when coupled with a strong labour market, higher commodity prices, and supply chain disruptions. This will unquestionably affect consumer behaviour and spending patterns as we move into the summer months.

The Russian invasion of Ukraine has left food prices soaring. The recent period of higher food prices has occurred because both countries are major wheat exporters. Additionally, higher prices for inputs such as fertilizer and natural gas have continued to increase production costs for farmers who have passed some of these costs on to consumers, leaving consumers with less bang for their buck.

What’s more, the Bank of Canada has signaled that higher interest rates are coming. Last month the Bank raised its interest rate by 0.5 percentage points and has signaled that another 0.5 percentage points increase is likely in June. That would culminate in the overnight rate being 1.50 per cent, raising the rate rapidly closer to the highest it’s been over the past decade (1.75 per cent rate in March 2020). As monetary tightening happens, we expect demand to cool and pressure on price growth to ease off. This is not a quick fix solution and will take time but should offer consumers some reprieve in the months ahead. However, this is a double-edged sword. With the ratio of credit market debt to disposable income currently at all-time highs, higher interest rates will put pressure on the finances of the many Canadians who have increased their borrowing during the past two years. This will leave less room for discretionary spending as more income is channeled into interest payments.
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Patricia Dent
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