Paul Vieira, Financial Post

OTTAWA — Mark Carney, the governor of the Bank of Canada, said Thursday consumers would be at the “heart” of an economic recovery that continues to pick up steam, leaving analysts worrying a new wave of spending will only drive consumers deeper into debt. Improved financial conditions and consumer confidence, coupled with indications that labour market conditions “may have” ceased deteriorating, has led the Bank of Canada to believe consumer spending will account for a larger share of total economic growth in the years ahead, according the central bank’s quarterly economic outlook, released Thursday. Consumer spending will offset some of the losses in the export-oriented sector, which is expected to contract 1% next year due to the strength of the Canadian dollar. “The conundrum for the central bank is the longer they keep interest rates low, the more likely it is that it will create [a debt] problem,” said Andrew Pyle, wealth advisor and markets commentator with ScotiaMcLeod. The central bank upgraded growth projections for the second half of 2009, seeing expansion of 2% for the third quarter and 3.3% for the fourth quarter. The bank previously expectated 1.3% and 3% in the third and fourth quarters, respectively. Then, the economy is set to expand 3% next year and 3.3% in 2011. In 2010, consumer spending is set to contribute half of the growth in final domestic demand, which includes consumer purchases, housing, public spending and business investment. By 2011 it will climb to three-quarters. This reliance on consumers has analysts wondering whether Canadians might find themselves caught in a debt trap, especially given the current low cost of borrowing — as led by the Bank of Canada’s record-low 0.25% policy rate. Laurentian Bank Securities has noted that household credit as a share of GDP (currently at 90%) and the household debt-to-GDP ratio (at 140%) are “quite elevated” and kept creeping up during the recession. At a media conference, Mr. Carney said the bank believes, all told, savers will outstrip borrowers, as incomes begin to grow on better job market conditions. He told reporters households should plan their financial affairs “prudently” on the anticipation that interest rates will eventually return to a more normal level. That might be easier said than done, said Stewart Hall, an economist at HSBC Securities Canada. He said history and markets demonstrate consumers respond to cheap prices, whether it is for gas or for financing. “The Bank of Canada [seems] to have removed themselves from the dynamic of cheap money … and instead fallen back on the view that, at best, we are simply seeing pent-up demand and at worst … that lenders and borrowers will self regulate and act in a prudent way,” Mr. Hall said. “The heart wants what the heart wants and many a purchase, houses included, prove emotional rather than prudent.” Mr. Carney said the housing market dynamic has “raised some concerns” at the central bank, although it anticipates housing growth to slow down in early 2010 as pent-up demand for real estate is met, affordability declines and the federal home-renovation tax credit expires. The strengthening dollar, the bank said, is driven in large part by the weakness in the U.S. currency. This, however, may be one of the consequences of unwinding global imbalances, as Americans will need to increase its exports and savings to generate wealth.

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