This Christmas was a good one for Canadian retailers. Moneris Solutions, a payment processor, reported 4.6 percent more spending. Early data from IBM shows that consumers were even spending on Boxing Day sales just after they opened their presents on Christmas morning (Link). Clearly, Canadian consumers are spending contrary to record consumer debt levels and low confidence.
Why have Canadians been spending given how loaded they are with debt? In the third quarter of 2011, Canadian debt reached an incredible 150 per cent of disposable income. The Canadian consumer is financially stretched. However, low interest rates have made major purchases like cars and homes more affordable, thus they can carry a higher debt load. Low interest rates have also led to abysmal returns on savings. Neither the market nor the Bank of Canada is giving the consumer much incentive to save their money. The European debt crisis has lowered consumer confidence and made stock markets as volatile as during the recession. Canadians are skittish about investing their money in stocks. Furthermore, the Bank of Canada has left the prime rate untouched at 1 per cent for some time, because of the crisis. Safe investments likely money market funds and GICs have rates of return well below inflation, making them unattractive. So consumers can invest in a volatile stock market, invest in safe assets with negligible returns, or buy a new TV. It’s not surprising that they are choosing to spend their money rather than save. According to Statistics Canada, in the last year and a half personal savings rates have plummeted from near 7 per cent to 3.5 per cent. Consumers are more confident than during the recession, but have poor investment options. Without more confidence in the stock market or a nudge towards savings from the Bank of Canada, it is unlikely that consumers will start decreasing their debt levels.